McKesson Canada Corporation v. The Queen

McKesson Canada Corporation v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2014-12-02
Neutral citation
2014 TCC 266
File numbers
2008-2949(IT)G, 2008-3471(IT)G
Judges and Taxing Officers
Patrick J. Boyle
Subjects
Income Tax Act
Decision Content
Docket: 2008-2949(IT)G
2008-3471(IT)G
BETWEEN:
MCKESSON CANADA CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
ORDER
In accordance with the attached reasons for recusal, I am recusing myself from completing the McKesson Canada proceeding in the Tax Court. This extends to the consideration and disposition of the costs submissions of the parties in this case, as well as to the 2010 confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry.
Signed at Ottawa, Canada, this 4th day of September 2014.
“Patrick Boyle”
Boyle J.
Citation: 2014 TCC 266
Date: 20140904
Docket: 2008-2949(IT)G
2008-3471(IT)G
BETWEEN:
MCKESSON CANADA CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR RECUSAL
Boyle J.
[1] I rendered my Reasons and judgment on the merits of the Appellant’s case on December 13, 2013. That decision has been appealed by the Appellant to the Federal Court of Appeal.
[2] I remain seized with the remaining issue of costs to be awarded in respect of the trial. I received written submissions on costs from the Respondent in March 2014 and from the Appellant in April 2014. On April 30, 2014, the Appellant confirmed to the Court that it did not want an oral hearing on costs, the Respondent having earlier communicated to the Court that it was not requesting an oral hearing on costs.
[3] I also remain seized with deciding the appropriateness of the parties’ written proposal of April 2014 for dealing with the satisfactory identification of any notionally or actually sealed confidential information and the public versions of documents prior to this Court’s file being made generally open to the public. This involves a reconsideration of the pre-trial confidential information order of Justice Hogan issued in March 2010.
[4] As detailed below, I have, of my own motion, decided that I am compelled to consider whether I need to recuse myself from the two remaining issues before this Court. A consideration of this issue is required because I became aware that the Appellant and Appellant’s counsel, together with its co-counsel in the Federal Court of Appeal in respect of the appeal of the trial decision, had made certain public written statements about me in its factum in the Federal Court of Appeal (the “Factum”) which, upon reflection, appear to me to clearly include:
(i) allegations that I was untruthful and deceitful in my Reasons;
(ii) clear untruths about me, what I said and heard in the course of the trial, as well as the existence of evidentiary foundations supporting what I wrote in my Reasons; and
(iii) allegations of impartiality on my part.
[5] This requires me to consider whether:
(i) I believe that a reasonable person reading the Factum, my Reasons, and the relevant portions of the transcript would believe that the trial judge so strongly complained of by McKesson Canada might not be able to remain impartial in his consideration of costs and confidential information;
(ii) I believe I can impartially consider, weigh and decide the costs and confidential information issues before me; and
(iii) whether the public challenge of my impartiality expressed by McKesson Canada and its co-counsel in the Factum is itself sufficient to warrant recusing myself at this stage.
[6] Points (i) and (iii) above require the consideration of the matter from the point of view of a notional reasonable and fair minded person, who is informed on the issue, and who takes time to reflect on whether he or she has an apprehension or reasoned suspicion of bias, actual or perceived, on my part.
[7] It is not my habit to review the factums filed in the Federal Court of Appeal in respect of my decisions. In this case, the Appellant’s Factum was drawn to my attention or sent to me by several prominent Canadian tax lawyers as well as by a colleague on the Court.
[8] A trial judge’s job on the merits ends with the rendering of reasons and judgment. There is rightly no role for the trial judge in the appeal of the trial decision. Counsel on each side in the appellate court is free to make whatever arguments they wish, including claiming or denying support in the record, the use of emphasis and spin, or even trying to argue a case it thinks it can win instead of the case it has. That is all of counsel’s choosing and to be ultimately considered and decided by the appellate court. For that reason, I will limit myself to only considering the specific issues set out above, and will restrict myself to statements in the Factum, statements in the Reasons, and statements from the trial transcripts (the “Transcript”).[1] This does have the effect of making these reasons more lengthy, more clinical, and more awkward than they might otherwise be, but I believe this is necessitated by considerations of fairness to the parties and the appellate court.
1. Where it Appears in the Factum that McKesson Canada States that the Trial Judge is Untruthful and Deceitful [9] This concern arises from paragraphs 84 through 89 of the Factum relating to the loss discount analysis, including my reliance upon the testimony of the Appellant’s witness Barbara Hooper with respect to the objective and effect of two specific termination triggering events in the RSA, as well as to the issue of notional ongoing corporate control.
[10] In paragraphs 128 to 132 of the Reasons, I wrote the following on the issue of the relevance of notional ongoing corporate control:
(e) Factors that Exist Only because of the Non-Arm’s Length Relationship
[128] Within a transfer pricing review, the question arises whether factors that exist only because of the non-arm’s length relationship are assumed away in the notional arm’s length analysis or remain relevant characteristics and circumstances.
[129] This question may not arise to any extent in the context of a single purchase at a fixed price. The question does appear significant in the context of a long-term commitment to do things over a period of time. For example, in transactions such as those involving the RSA, does the Court assume a notional arm’s length MIH would still enjoy the benefit of the Irish company loan supported by the MIH2 guarantee and indemnity? In looking at transactions like the RSA, does the Court assume the notional arm’s length MIH still has the power throughout the term of the notional arm’s length contract to change McKesson Canada’s name, sell McKesson Canada, or do something else in order to trigger a termination event at will? Does the Court assume that the notional arm’s length purchaser still has the right to cause McKesson Canada to agree to change terms as they apply to future transactions under the agreement? Does the Court assume that the notional arm’s length MIH still has access to all of the financial information of McKesson Canada and information regarding its receivables portfolio and its entire business even though it may not be specified or required in the RSA?
[130] This issue was addressed by Justice Pizzitelli in Alberta Printed Circuits v. The Queen, 2011 TCC 232:
It is important to note that factors or circumstances that exist solely because of the non-arm’s length relationship of the parties should not be ignored, otherwise the reasonable businessman would not be standing entirely in the Appellant’s shoes. . .
… In General Electric, the Federal Court of Appeal confirmed that no error of law was made in taking into consideration the Appellant in that case, as a sub of its larger parent company, stood in the position of having an implicit guarantee by its parent of its bank debts.
[131] Based on this, all circumstances, including those that arise from, derive from or are rooted in the non-arm’s length relationship should be taken into account.
[132} I think the better view is therefore that the Court can and should consider notional continued control type rights in appropriate circumstances when looking at term or executory contract rights. Not to do so would be to not look at all of the relevant characteristics and circumstances of the relationships. If these were to be ignored by a Court, companies within wholly controlled corporate groups could enter into skeletal agreements conferring few rights and obligations to the non-resident participant, (such as financial information disclosure, use of funds, financial covenants et cetera), all with the view to obtaining a more favourable transfer price to reduce Canadian taxes. Not approaching this issue this way would seem entirely inconsistent with this Court and the Federal Court of Appeal in G.E. Capital having focused on implicit unwritten, unenforceable guarantees of the parent company of the borrower. However, in this case, I do not need to do so in order to fully dispose of the appeal with respect to the proper transfer pricing adjustment, as detailed below. This too can be left for another day.
[11] In the Reasons I wrote the following on the issue of termination triggering events and their relevance to loss discount:
[26] MIH could terminate its obligations to purchase any further McKesson Canada receivables upon the occurrence of certain defined termination events, generally designed to identify or anticipate deteriorating creditworthiness of McKesson Canada or its pool of customers generating the receivables. These events included financial defaults of McKesson Canada or its affiliates, increases in the delinquency ratio or loss ratio of the receivables beyond specific thresholds, a downgrade in the credit rating of McKesson U.S., McKesson Canada’s name being changed to drop the word McKesson, McKesson Canada ceasing to be controlled by McKesson U.S., McKesson U.S. ceasing to guarantee McKesson Canada’s bank and commercial paper lenders, and any event occurring which materially adversely affected the enforceability or collectibility of the receivables or MIH’s rights under the agreements It can be noted that the termination events were not limited to things in McKesson Canada’s control, and included events in the control of its direct and indirect shareholders/parent corporations.
[. . . ]
b) Termination Events
[59] TDSI is satisfied that the triggers in the RSA definition of termination event are within the range of normal in an arm’s length transaction “of this nature”. I repeat my earlier observations about her use of this phrase in the TDSI opinion.
[60] The TDSI opinion makes specific reference to the role of such termination triggers as protection for poor performance of receivables or declining creditworthiness of the seller. It identifies McKesson Canada’s creditworthiness as seller as relevant in part because of its obligations to remit collections to MIH. TDSI is of the express view that “because [McKesson Canada] is so closely tied and important to [McKesson U.S.], it is reasonable to use the public debt ratings of [McKesson U.S.] as an indication of [McKesson Canada’s] creditworthiness”.
[61] The TDSI opinion goes on to specifically consider i) the receivables pool’s delinquency ratio trigger in the RSA, and ii) the receivables pool’s loss ratio trigger in the RSA.
(i) Delinquency Ratio Trigger
[62] TDSI considered the improving two year historical trend in the delinquency ratio of McKesson Canada’s receivables and the recently maintained 1.0% rate. The 2.5% trigger rate in the RSA would, in TDSI’s opinion, represent a significant adverse deviation from the current steady state of 1% and so considered reasonable. TDSI highlighted the importance of the dynamic four-month rolling average approach to measuring the delinquency ratio in the RSA, and uses this approach in its analysis. TDSI confirmed that this is consistent with the three to six month periods generally used for such purposes.
(ii) Loss Ratio Trigger
[63] TDSI looked at three years of historic bad debt experience on McKesson Canada’s receivables portfolio. TDSI identified the difference between accounting write-offs and the 90 day delinquency definition of losses for purposes of the loss ratio in the RSA, with the result that the latter ratio could be expected to exceed the former. TDSI opined that a dynamic loss ratio, which measured a four-month average 90 day delinquency, and with a trigger of 0.25%, appeared reasonable given that, although write-offs to sales on a monthly basis at times reached this level, it had never exceeded 0.10% on a four-month rolling average.[footnote 21: It was acknowledged in Ms. Hooper’s cross-examination that, in fact, it had not exceeded 0.04%, much less 0.10%. That is, it was not that TDSI considered a 2.5 times multiple reasonable, it considered a 6 + times multiple reasonable but did not expressly say so.]
[. . . ]
[194] Ms. Hooper added that the delinquent portfolio performance trigger serves as an early warning system. Typically with receivables one will see delinquencies increase in advance of seeing losses increase. For this reason, she explained one wants the trigger rate to permit termination of the agreement early enough for there to not be material losses. She clearly understood that when the transaction could be terminated would have a fairly significant affect on the overall risk that was being transferred. According to Ms. Hooper, portfolio performance triggers, delinquency and default rate triggers, were designed to limit the ultimate losses to the purchaser by ceasing the acquisition of new receivables that might not be expected to perform as well as receivables originated previously.
[. . . ]
[306] The RSA was signed at a time when the receivables pool’s write-offs to sales performance had been in the range of 0.04%. This was well known and tracked by McKesson Canada and McKesson Group. The RSA gave MIH an immediately exercisable termination right in the event the pool’s Delinquency Ratio or Loss Ratio increased by specific measures.
[307] Ms. Hooper’s evidence was that these two termination event triggers in particular were designed to effectively stop the transfer of additional receivables once the portfolio does not perform as well as it did in the past. The Delinquency Ratio was designed as an early warning system. Given that delinquencies can be expected to increase in advance of seeing losses increase, the termination right was designed to occur early enough that one is not going to have very material losses. According to Ms. Hooper’s testimony, the Loss Ratio and Delinquency Ratio combined should allow the purchaser to stop acquiring additional receivables in time to not suffer materially higher losses than expected based on past performance. Ms. Hooper testified that she and her team at TDSI looked at both the historical loss and delinquencies in the McKesson Canada receivables pool as part of its engagement in preparing the TDSI Report.
[308] I do not necessarily accept the TDSI Report’s opinions on the reasonableness, normalcy or arm’s length nature of these two termination triggers in the RSA. Indeed, I would expect they might suffer from the same shortcomings as affects the rest of the TDSI Report, which is primarily that the RSA is not a securitization and is in that respect outside the expertise of Ms. Hooper and her group. In any event, given that these two ratios are defined in the RSA to include McKesson Canada financial information that is not in evidence, or at least certainly not adequately explained in the evidence, and that these defined ratios and their volatility leading up to the RSA were not put in evidence, I can not reach the conclusion that I am satisfied with the TDSI’s Report’s conclusions on their terms.
[309] However, I fully accept Ms. Hooper’s explanation of their purpose and effectiveness as designed. That is, I find that the purpose and effect of the Delinquency Ratio termination event trigger and the Loss Ratio termination event trigger in the RSA were designed and fully expected to limit MIH’s risk of purchasing any day’s receivables from McKesson Canada that could be expected to have materially higher losses than had been experienced on the pool historically.
[310] The historic loss performance on McKesson Canada’s receivables pool was in the range of 0.04%. I conclude from all of this that a notional arm’s length MIH would have been able to and would have terminated its obligations under the RSA before it was obligated to purchase receivables that would have a materially higher credit loss risk than something in the range of 0.04%.
[311] Allowing for a 50% to 100% increase as an extremely generous interpretation of what Ms. Hooper could have meant by material (in part to compensate for the lack of elegance in this approach), I find that a notional arm’s length MIH’s credit loss risk on its continuing purchase of receivables is that, at some future point in the RSA term (but not in the very short term), it could have purchased about four months of receivables with an anticipated write-offs to sales number in the range of 0.06% to 0.08%. These lesser quality receivables would only be expected to have been purchased in the last four months of the RSA prior to termination. Those bought on December 16, 2002 and for the other months prior to the four months preceding termination could continue to be expected to be of a better quality.
[312] Using this approach, the Court concludes that a Loss Discount component of the Discount Rate in the range of 0.06% to 0.08% is at the generous end of what a notional arm’s length MIH and McKesson Canada would agree to.
[313] This range is consistent with the number arrived at by Mr. Finard’s structured finance approach. That approach identified that the 0.04% historic write–offs to sales number for McKesson Canada’s receivables pool was comparable to Moody’s published information for companies rated between A and Baa, which in turn had credit risk spreads according to TDSI of 0.50% and 1.00% per annum, and was computed on a weighted average basis by Mr. Finard at 0.68%. Once adjusted for a DSO of 30 days, a 0.68% annual credit spread reflects a discount of 0.06%.
[314] For these reasons, the Court finds based upon what evidence was provided that an arm’s length Loss Discount for purposes of the RSA would be in the range of 0.06% to 0.08%.
[12] In the Factum the Appellant stated, at paragraphs 73 and 83 to 89:
73. . . . the Trial Judge disregarded the consensus view of the taxpayer and the Crown and made a critical error: in his hypothetical transaction, he believed that he was required to assume that the hypothetical purchased somehow would control the supposedly unrelated hypothetical seller. . . .
83. The “loss discount” – the amount notionally included to compensate the purchaser (here, MIH) from assuming credit risk – was a key component in the discount rate. It is clear from the Trial Judge’s analysis of this component that he concluded that MIH assumed no material risk in the transaction because, in the Trial Judge’s misconstrued hypothetical, MIH could have triggered a termination event whenever it chose by simply changing McKesson Canada’s name, for example. In so finding, the Trial Judge simply ignored the relevant contractual terms agreed by the parties and expressed in the Agreement, and the actual functional allocation and assumption of risk by the parties.
84. Such an approach may be entirely legitimate in a case involving GAAR, or paragraph 247(2)(b). But neither of these grounds for challenging the Agreement was advanced by the Crown; they are not relevant to this litigation. The Trial Judge, without acknowledging it, has challenged whether the written terms of the Agreement reflected the “real” allocation of risk between MIH and McKesson Canada. He has effectively treated the Agreement as a sham, without legal authority or evidentiary basis. Indeed, the weight of evidence adduced by the Crown suggested that a holdback or reserve of about 20% (or $90 million) would have been needed in order to eliminate MIH’s risk.
85. In assuming his own version of the facts with respect to risk, and re-writing (by ignoring) critical terms of the Agreement related to risk, the Trial Judge priced a transaction that never occurred. The loss discount then identified and relied upon in the Trial Judge’s Reasons can only be reconciled with a transaction in which the purchaser (here, MIH) assumes no risk. The Trial Judge says:
I conclude from all of this that a notional arm’s length MIH would have been able to and would have terminated its obligations under the [Agreement] before it was obligated to purchase receivables that would have a materially higher credit loss risk than something in the range of 0.04%. . .
Using this approach, the Court concludes that a Loss Discount component of the Discount Rate in the range of 0.06% to 0.08% is at the generous end of what a notional arm’s length MIH and McKesson Canada would agree to.
86. At no point in the trial did the Crown assert that, at arm’s length, MIH “would have been able to” terminate its obligations under the Agreement whenever losses exceeded a “materially higher” threshold of 0.06%-0.08%. Nor did any of the Crown’s expert witnesses provide evidence that would tend to support this erroneous proposition.
87. This assertion is in any event patently wrong. In fact, MIH was obliged under the Agreement to continue funding McKesson Canada for up to $900 million for the full five year term absent a defined termination event – including if losses increased significantly. The Trial Judge’s suggestion that MIH “would have been able to” terminate the Agreement if losses exceeded 0.06-0.08% is palpably wrong. The threshold established under the plain terms of the Agreement for such termination was in fact 0.25%, not 0.06-0.08%. In fact, recent history was that losses exceeded 0.06%. How could MIH have been “able to” terminate if losses reached, for example, 0.10%?
88. Given that it is plainly inconsistent with the terms of the Agreement, the Trial Judge’s assertion that, in the hypothetical transaction, a notional arm’s length MIH would have terminated its obligations under the Agreement if losses exceeded 0.06%-0.08%, can only be explained as follows: The Trial Judge assumed that a notional, arm’s length MIH would control McKesson Canada, and would therefore be in a position to trigger a termination event under the Agreement by causing McKesson Canada to default under its terms. This is so notwithstanding the Trial Judge’s contention, at paragraph 132 of his Reasons, that “in this case, I do not need to [consider notional continued control] in order to fully dispose of the appeal with respect to the proper transfer pricing adjustment”.
89. Indeed, in at least two place in his Reasons, the Trial Judge alludes specifically to MIH’s ability – qua shareholder of McKesson Canada – to trigger termination of the Agreement: At paragraph 26, he notes the “termination events were not limited to things in McKesson Canada’s control, and included events in the control of its direct and indirect shareholders/parent corporations”. At paragraph 129, excerpted above, the Trial Judge asked himself “[i]n looking at transactions like the [Agreement], does the Court assume the notional arm’s length contract to change McKesson Canada’s name, sell McKesson Canada, or do something else in order to trigger a termination event at will?” The Trial Judge did not, in fact, leave this question for another day, as he claims to have done. Rather, the Trial Judge answered this question in the affirmative in his analysis of the loss discount. This critical legal error undermines the Trial Judge’s entire analysis.
[13] In these circumstances, I am deeply troubled by the statement by the Appellant in paragraph 89 of the Factum that “[t]he Trial Judge did not, in fact, leave this question for another day, as he claims to have done”.
[14] I am similarly deeply troubled by the statement by the Appellant in paragraph 84 of the Factum that “[t]he Trial Judge, without acknowledging it, has challenged whether the written terms of the Agreement reflected the “real” allocation of risk between MIH and McKesson Canada”.
[15] I am equally concerned by the statement of the Appellant in paragraph 88 of the Factum that “[t]his is so notwithstanding the Trial Judge’s contention, at paragraph 132 of his Reasons, that “in this case, I do not need to [consider notional continued corporate control] in order to fully dispose of the appeal with respect to the proper transfer pricing adjustment”.
[16] There are no polite qualifiers in any of theses three sentences.
[17] These allegations of the Appellant are said in paragraphs 85 and 88 of the Factum to critically turn upon there being no other way to reconcile what I wrote, and that I therefore must have in fact done something different than I said I was doing.
[18] It appears to me that the Appellant has chosen to challenge my truthfulness, honesty and integrity in my Reasons in order to allow it to advance the argument that I was somehow, notwithstanding what I clearly said about ongoing corporate control issues being able to put entirely aside in deciding the appeal, (and what I clearly said about the Delinquency and Loss Ratios triggers and Ms. Hooper’s evidence on their objective and effect) somehow doing just that.
[19] I believe that paragraphs 307-310 of the Reasons are very clear and do not permit of ambiguity, uncertainty, or any lacuna or leap for the reader to fill in. The only termination rights discussed were those triggered by breaches of the Delinquency Ratio and the Loss Ratio as defined and set out in the RSA. It is equally clear that I grounded my findings on the preceding paragraph which summarized the testimony of Ms. Hooper of TDSI, the Appellant’s witness who issued the TDSI Report, on the purpose and effectiveness of these two termination right triggering events. There is no basis for the Appellant stating that the only way to reconcile my conclusion is that I did something entirely different, that I specifically said I wasn’t doing, which was looking at continuing corporate control rights such as changing the company’s name.
[20] For these Reasons, it is my view that the Appellant has wrongly accused me of being untruthful, dishonest and deceitful. I am simply unable to read their Factum or the Reasons any other way on this point.
[21] I believe they have wrongly written these things in the Appellant’s Factum about me intentionally under the guise of fearlessly advancing and representing the interests of McKesson Canada. I believe this clearly crosses the line as to what is appropriate.
[22] For purposes of deciding whether or not to recuse myself, it is my opinion and my view of the parties and their counsel that are relevant, along with what a reasonable person would apprehend my views and opinions to be. Whether my reading of the Factum is correct or not, like whether my decision on the merits is correct or not (and whether or not I am reading the Factum correctly), remains for the appellate court and others to decide.
[23] On a related point, it is surely apparent to the Appellant from the evidence of its own witness, Ms. Hooper, the TDSI Report, and the Reasons, that historical losses expressed as write-offs to sales (historically in the 0.04 cents on the dollar range), are distinctly different in material ways from the Delinquency Ratios and the Loss Ratios which are defined in the RSA and which triggered MIH termination rights under the terms of the RSA. There is nothing whatsoever that appears unclear about this from paragraphs 194 and 306 and 307 of the Reasons. The Appellant does not in its Factum attempt to suggest or explain why that is in fact not the case.
[24] This appears to me to have been done in order to advance confusion not clarity or accuracy as they write in paragraph 87 of the Factum: “[t]he Trial Judge’s [assertion] is palpably wrong. The threshold established under the plain terms of the Agreement for such termination was in fact 0.25%, not 0.06-0.08%. In fact, recent history was that losses exceeded 0.06%. How could MIH have been “able to” terminate if losses reached, for example, 0.10%?” I find it exceedingly hard to believe that the Appellant could remain unaware of the difference between historical loses computed as write-offs to sales on the one hand, and either a delinquency ratio which measures time to receive payment, or a deemed 90 day delinquency in computing loss ratios. (Indeed as noted below, they clearly understand this in other parts of their Factum and in the Appellant’s written submissions at trial).
2. Where it Appears That the Appellant States in its Factum Untruthful Things About the Trial Judge [25] Most of my concerns under this heading are rooted in the very first paragraph of the Appellant’s Factum which states that:
1. In this case, the Trial Judge discarded the case pleaded and argued by the parties and decided the appeal on grounds that were not raised in the pleadings or argued at trial, but made their first appearance in the Trial Judge’s Reasons well after the trial was over.
a) The Predominant Purpose and Intention was to Reduce McKesson Canada’s Canadian Tax Liability [26] In paragraph 18 of the Reasons I wrote that “the predominant purpose of McKesson Canada entering into the transactions was the reduction of its Canadian tax on its profits.” I return to this in paragraph 274 of the Reasons using very similar language:
[274] I find as a fact that the predominant purpose and intention of McKesson Canada participating in the RSA and related transactions with the other McKesson Group members was not to access capital or to lay off credit risk. Those were results of the transactions but did not motivate them. The purpose was to reduce McKesson Canada’s Canadian tax liability (and therefore McKesson Group’s worldwide tax liability) by paying the maximum discount under the RSA that McKesson Group believed it could reasonably justify. For the McKesson Group this appears to have been much more of a tax avoidance plan than a structured finance product. No reason was ever given for wanting to transfer risk to Luxembourg.
[27] In paragraph 7 of the Factum, the Appellant states:
7. First, the Trial Judge made key factual findings on matters that were not raised in the assessment or put in issue at trial: . . . that the receivable sale was devoid of commercial purpose and contrived to achieve a tax benefit. There was next to no hint at trial that these issues were of concern to the trial Judge. . . .
[28] The Appellant restates this in paragraph 42 of its Factum:
42. The Trial Judge’s analysis and ultimate decision rely critically on three key propositions, each of which amounts to an error of law: . . . that the receivable sale was entirely tax-motivated and devoid of commercial purpose. . .
[29] In paragraph 43 of the Factum, the Appellant again states that this tax motivation proposition was “not put to McKesson Canada in the trial of this matter.”
[30] The Appellant restates this another time in paragraph 53 of the Factum in Part B “The Trial Judge Erred In Law By Relying On Propositions That Were Never Put To McKesson Canada”: “the receivable sale was entirely tax motivated, and devoid of commercial purpose.”
[31] This point is referred to yet again in paragraph 65 of the Factum: “and, as the matter of motive was never in issue in the litigation, McKesson Canada was deprived of any opportunity to lead evidence and make submissions on the point”.
[32] In paragraph 67 of the Factum, the Appellant continues this with “the taxpayer’s motivation was never in issue . . . .”
[33] In paragraph 70 of the Factum, the Appellant states “…the Trial Judge’s analysis is infected by his pejorative and unfair comments about McKesson Canada’s motivation, a matter that was . . . never argued at trial.”
[34] Was the issue never put to the Appellant? Was the Appellant deprived of the opportunity to address this in the proceedings? Let us turn to the record of the trial proceedings.
[35] On the third day of this trial (October 19, 2011), during the third day of testimony from the Appellant’s first witness, Mr. Brennan, after listening to the Vice-President Tax’s testimony in-chief, I was called upon to respond to an objection by Appellant’s counsel to a line of questioning by Respondent’s counsel in cross-examination. The objection is raised, debated and addressed on pages 58 through 62 of Volume 3 of the Transcript. On page 62 I said:
And, frankly, this whole line of questioning, I note this was a tax oriented transaction, they did it for tax purposes. Mr. Brennan was absolutely clear about that in direct. And there is not a VP of tax in the world who didn’t think about tax consequences.
[36] Appellant’s counsel did not then or later challenge, address or even speak to my clear and early communication of my overall impression of his witness’ testimony as lead by him in-chief. Appellant’s counsel did not ask any questions at all in his opportunity for redirect.
[37] In course of the first morning of Appellant’s oral argument, on January 31, 2012, I said to Appellant’s counsel, who had just completed his summary of the background to the RSA and was turning to the RSA itself (at page 3514 of Volume 22 of the Transcript):
Sorry, before the RSA, I believe in-chief Mr. Brennan acknowledged [that] with an Irish company, a couple of Luxembourg companies and a Nova Scotia unlimited liability company [,] this was a tax-driven structure. [While] it had the commercial purpose as you’ve outlined [,] I thought it was in-chief that he acknowledged that taxes play a part. Not that anything turns on it.”
[38] To this, counsel’s response (at page 3515) was “[o]ne of the advantages of this structure was tax advantages for sure. . . .”
[39] In the Appellant’s first Supplemental Written Submissions filed with the Court after the hearing (those of March 2012), the Appellant devoted pages 39 to 43 to addressing, in counsel’s words the “related question that arose in argument whether the approach being advocated by the Appellant, if accepted by this Court, might appear to condone abusive structures”. In these five pages the Appellant relies upon the Duke of Westminster principle, and argues that the RSA transactions compare favourably to “plain vanilla” planning.
[40] It appears very clear to me that, while the Appellant may have every right to seek to challenge the evidentiary foundation of my conclusions and findings, they have simply told clear untruths about me and what I did or did not say when they state that McKesson’s tax motivation was not ever put to them during the trial and that they were therefore deprived of any opportunity to address it.
[41] I certainly believe I clearly put it to Appellant’s counsel during his first witness’ testimony, and raised it again with counsel at the start of his oral argument. The Appellant made written submissions on the issue of tax planning as he acknowledges it arose in argument. One can read what they will into the Appellant’s decision not to argue the point or conduct redirect examination, but it appears to me to be patently untrue that I did not raise it with the Appellant early, at times when they could respond with additional evidence, with a summary of the evidence to change my impression, or with whatever legal argument they chose.
[42] I would also note that I never said in my Reasons that the RSA transactions were devoid of commercial purpose. I believe it would take a very tortured reading of paragraph 18 of my Reasons (above) to find any support for that allegation, which is similarly repeated throughout the Factum.
[43] Further, I remain of the view that my Reasons accurately describe the evidence on motivation and use of funds where I wrote at paragraph 9 that:
[9] At that time, McKesson Canada had no identified business need for a cash infusion or borrowing, nor did McKesson Group need McKesson Canada to raise funds for another member of the group. There was a so-called double-dip Nova Scotia Unlimited Liability Company or ULC financing which was coming to maturity and would need to be recapitalized in some fashion; this was for a fraction of the amount of the new receivables facility. McKesson Canada did not approach its traditional lenders or conventional financial institutions (nor anyone else) before entering into its own non-arm’s length receivables facility and related transactions. The McKesson Group had previously put in place a tax-effective international corporate structure and inter-group transactions that allowed it to amass very large amounts of cash in Ireland. The non-Canadian members of the McKesson Group were able to use this money to finance all of the purchases of McKesson Canada’s receivables under the facility.
And where I wrote at paragraph 214 that: “There was no evidence that McKesson Canada or McKesson Group was even interested in considering factoring its receivables to any arm’s length financial institution player in factoring markets, presumably because profits would then have left the McKesson Group.”
And where I wrote at paragraph 274 that: “No reason was ever given for wanting to transfer risk to Luxembourg.”
And where I wrote at paragraph 348:
[348] There was no satisfactory evidence tendered that would suggest that McKesson Canada was driven to seek receivables financing from a high cost of funds/high cost factoring company and not a better funded/lower yield/lower cost major financial player described in the taxpayer’s own evidence. I was not, however, provided with evidence of the cost of capital associated with receivables factoring by major well-funded players.
b) The Reifsnyder Evidence on Credit Risk Insurance Expertise, Availability, and as a Means to Address Risk in Structured Finance Products, and the Absence of Evidence on Costs or Pricing Thereof [44] The Appellant states in paragraph 37 of the Factum:
37(e) Similarly, the Trial Judge asserts that “[t]here is credit risk or credit default insurance available in the market from arm’s length commercial players in the financial markets,” and that he “found it somewhat surprising that neither side tendered any such evidence.” With respect to Mr. Reifsnyder, he states “[n]otwithstanding his extensive knowledge, experience and presentations on credit insurance for structured finance transactions, and his reference to its availability in his testimony, Mr. Reifsnyder seemingly never considered the cost of insuring the receivables in his pricing approach, nor to test the results of his approach. Nor did he explain why he did not do so”. This point was never raised at trial. . .
[45] The opening words of paragraph 37 of the Factum says this concern was “. . . never articulated at trial, such that McKesson Canada had no opportunity to respond to them. . . .”
[46] Was this never raised at trial? Did the Appellant have no opportunity to respond? Let us again turn to the record of the trial proceedings.
[47] At the outset of Mr. Reifsnyder’s testimony during the trial, Appellant’s counsel asked him to tell the Court what kind of consultant work he was doing. His response included (at pages 833-4 of Volume 7 of the Transcript):
And now with my wife I am building a financial advisory risk management business for small businesses and individuals, focusing primarily on insurance solutions.
[48] From page 851 through page 859 of Volume 7 of the Transcript for October 27, 2012, Appellant’s counsel led Mr. Reifsnyder through only his credit risk insurance experience with securities and structured finance over the period 1997 to 2008 working in senior roles for significant players in this market, namely,
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