Canada v. Rio Tinto Alcan Inc.

Canada v. Rio Tinto Alcan Inc.
Court (s) Database
Federal Court of Appeal Decisions
Date
2018-06-25
Neutral citation
2018 FCA 124
File numbers
A-360-16, A-361-16, A-432-16
Notes
A correction was made on August 15th, 2018.
Decision Content
Date: 20180625
Dockets: A-360-16
A-361-16
A-432-16
Citation: 2018 FCA 124
CORAM:
PELLETIER J.A.
GAUTHIER J.A.
TRUDEL J.A.
Docket: A-360-16
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
RIO TINTO ALCAN INC.
Respondent
Docket: A-361-16
AND BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
RIO TINTO ALCAN INC.
Respondent
Docket: A-432-16
AND BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
RIO TINTO ALCAN INC.
Respondent
Heard at Montréal, Quebec, on September 28, 2017.
Judgment delivered at Ottawa, Ontario, on June 25, 2018.
REASONS FOR JUDGMENT BY:
PELLETIER J.A.
CONCURRED IN BY:
GAUTHIER J.A.
TRUDEL J.A.
Date: 20180625
Dockets: A-360-16
A-361-16
A-432-16
Citation: 2017 FCA 124
CORAM:
PELLETIER J.A.
GAUTHIER J.A.
TRUDEL J.A.
Docket:A-360-16
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
RIO TINTO ALCAN INC.
Respondent
Docket:A-361-16
AND BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
RIO TINTO ALCAN INC.
Respondent
Docket:A-432-16
AND BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
RIO TINTO ALCAN INC.
Respondent
REASONS FOR JUDGMENT
PELLETIER J.A.
I. INTRODUCTION
[1] This appeal raises, once again, the tax treatment of expenses incurred by a taxpayer in the course of investigating if and how it should proceed with a capital transaction. The taxpayer, Rio Tinto Alcan Inc. (Alcan) made significant payments to its investment bankers for advice on whether to proceed with the acquisition of Pechiney S.A. (Pechiney) and how to structure the transaction if it were to proceed. In a related transaction, it paid its investment bankers for advice as to how to divest itself of certain assets by spinning them off to its shareholders via a new corporation, Novelis Inc. (Novelis). As part of these transactions, Alcan also incurred other fees, only some of which are in issue in this appeal.
[2] Alcan deducted these expenses in the taxation years in which they were incurred pursuant to section 9 of the Income Tax Act, R.S.C. 1985, (5th Supp.) c.1 (the Act). The Minister disallowed the deductions pursuant to paragraph 18(1)(b) of the Act on the basis that they were incurred on account of capital.
[3] The Tax Court of Canada, per Hogan T.C.J., in a decision reported as 2016 TCC 172 (Reasons), found that a substantial portion of the fees paid to the investment bankers was deductible on the basis that the fees were incurred by Alcan’s board of directors in the discharge of its oversight responsibilities with respect to the management of Alcan’s income earning process. The Tax Court referred to the allowable expenses as “Oversight Expenses”. At the same time, the Tax Court dismissed Alcan’s appeal with respect to the balance of the investment bankers’ fees, as well as certain other fees. These other fees, which the Tax Court called the “Advertising Fees” and “Reporting Fees”, whose deduction was disallowed on the basis that they were incurred for the purpose of executing the Pechiney and Novelis transactions so that they were therefore outlays in the nature of capital. The Tax Court called these expenses “Execution Costs”.
[4] The Minister appeals to this Court with respect to the deductibility of the Oversight Expenses while Alcan cross-appeals with respect to certain Execution Costs.
[5] In order to provide an idea of the scale of the amounts involved, the deductions which were disallowed in the Pechiney transaction totalled $77,374, 669 while those disallowed in the Novelis transaction came to a total of $19,759,339. Of those amounts, investment bankers’ fees came to $34, 201, 427 in the Pechiney transaction and $16, 031, 657 in the Novelis transaction.
[6] For the reasons which follow, I would dismiss both the appeal and the cross-appeal.
II. FACTS
[7] Alcan is a publicly listed company whose shares are traded on the Toronto, New York and London stock exchanges. At the material times, Alcan was the parent company of the Alcan Group, a leading producer of primary metal and rolled aluminum products. In the early 1990s, Alcan considered merging with Pechiney and Alusuisse Lonza Group Ltd. (Algroup), two of the largest industrial concerns in France and Switzerland respectively, with core business in the aluminum sector. In 2000, Alcan successfully merged with Algroup but its plans with respect to Pechiney did not materialize.
[8] In 2002, Alcan again considered the possibility of a transaction with Pechiney. To assist it in assessing a possible transaction, Alcan retained the services of two investment banks, Morgan Stanley & Co. Incorporated (Morgan Stanley) and Lazard Frères & Co. LLC (Lazard Frères). The bankers were asked to analyze the business and financial conditions of Alcan and Pechiney and to prepare financial models of the potential transaction.
[9] The bankers worked independently on financial models which analyzed various strategies and alternatives with respect to a possible Pechiney transaction. They prepared financial and valuation opinions as well as industry, market and price analyses with respect to various opportunities and considered a variety of possible financial arrangements regarding Pechiney. Morgan Stanley, as the lead investment firm, made a number of presentations to the Alcan board of directors from December 2002 through July 2003. Lazard Frères supplemented the work done by Morgan Stanley and became involved in the process later than the latter. In particular, Lazard Frères, being a French firm, had the necessary connections and experience to assist with issues arising in France and with the analysis of French capital markets: see Reasons at paras. 12 and 21.
[10] On July 2, 2003, the Alcan board of directors approved a purchase offer proposal for Pechiney’s share capital. Alcan’s made an initial offer on July 7, 2003, which was rejected. However, on September 12, 2003, Pechiney’s board recommended acceptance of a revised offer, subject to the approval of French and American regulatory authorities. Once the regulatory hurdles were cleared, the revised offer was presented to Pechiney shareholders in October 2003 and, by December 23, 2003, holders of more than 95% of Pechiney’s share capital and voting rights had accepted Alcan’s offer.
[11] European and American competition regulators had raised concerns with respect to the concentration of aluminum rolling mills in Alcan’s hands as a result of the Pechiney transaction. In response, Alcan gave undertakings that it would separate ownership of two European rolling mills (Neuf Brisach and Norf) and two American mills (Oswego and Ravenswood). This was one of the factors which led to the Novelis transaction.
[12] Ultimately, Alcan retained two of the mills (Neuf Brisach and Ravenswood) while the other two (Norf and Oswego) were among the rolled products assets which were spun off to Alcan shareholders. This was done by means of a share transaction in which shares of Arcustarget Inc. (Archer), the Alcan subsidiary which held Alcan’s rolled products assets, were transferred to Alcan shareholders through shares in Novelis, a new corporation specifically created for this transaction. In the end, Novelis held substantially all of Alcan’s pre-Pechiney rolled aluminum product business as well as certain assets in Brazil, Europe and Asia. At the conclusion of a series of share transactions, each Alcan shareholder of record received one common share of Novelis for every five shares of Alcan so that each then held shares in both Alcan and Novelis.
[13] The investment bankers also provided services with respect to the Novelis transaction. From late 2003 to May 17, 2004, Morgan Stanley provided Alcan with strategic advice concerning the financial consequences of various divestiture options. From May 18, 2004, to November 22, 2004, Morgan Stanley provided Alcan with strategic advice concerning the financial consequences of the various options for disposing of the Archer shares. Morgan Stanley issued a fairness opinion on the spin-off and on November 23, 2004, recommended the spin-off as the best divestiture option. From November 23, 2004, Morgan Stanley continued to provide advice and opinions to ensure compliance with securities legislation, and participated directly in finalizing the spin-off: Reasons at para. 51.
[14] Lazard Frères provided independent advice and fairness opinions with respect to the same issues as those analyzed by Morgan Stanley. Lazard Frères was mainly involved in the analysis of an alternative sale transaction, in which the assets would be sold to a third party. Offers were received and analyzed but ultimately, this option was not pursued: Reasons at paras. 44–47, 52.
[15] Not surprisingly for a transaction of this size, Alcan also incurred other substantial expenses. Some of these, such as representation expenses pursuant to paragraph 20(1)(cc) were refused by the Minister but subsequently accepted by the Tax Court. I shall deal with these only to the extent that they are issues in this appeal.
III. THE DECISION UNDER APPEAL
[16] After setting out the facts, the Tax Court discussed the general principles applicable to the treatment of amounts as either income or capital. It began with a discussion of the relevant parts of sections 9 and 18 of the Act, reproduced below:
9 (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
9 (1) Sous réserve des autres dispositions de la présente partie, le revenu qu’un contribuable tire d’une entreprise ou d’un bien pour une année d’imposition est le bénéfice qu’il en tire pour cette année.
18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
18 (1) Dans le calcul du revenu du contribuable tiré d’une entreprise ou d’un bien, les éléments suivants ne sont pas déductibles :
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
a) les dépenses, sauf dans la mesure où elles ont été engagées ou effectuées par le contribuable en vue de tirer un revenu de l’entreprise ou du bien ;
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
b) une dépense en capital, une perte en capital ou un remplacement de capital, un paiement à titre de capital ou une provision pour amortissement, désuétude ou épuisement, sauf ce qui est expressément permis par la présente partie ;
[17] The Tax Court noted that section 9 defines income from property or business as the taxpayer’s profit from that business or property in the year, where profit is the difference between revenue and expenses incurred to earn the revenue, subject to any limitations in the Act. Two such limitations are paragraphs 18(1)(a) and (b) of the Act. Paragraph 18(1)(a) provides that an expense can be deducted only to the extent that it was incurred to earn income from the business or property: Reasons at para. 68. The Tax Court found that paragraph 18(1)(a) was not an issue in Alcan’s appeal: Reasons at para. 70.
[18] On the other hand, paragraph 18(1)(b) was in issue in the appeal as it was the basis for the Minister’s disallowance of the “Disputed Expenses”, which is how the Tax Court referred to the expenses claimed by Alcan and refused by the Minister.
[19] Paragraph 18(1)(b), which disallows deductions to the extent that they are “on account of capital,” led the Tax Court to a review of the jurisprudence on the issue of what constitutes an outlay on account of capital.
[20] In the course of that review, the Tax Court reviewed the jurisprudence beginning with Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111 (Johns-Manville cited to S.C.R.) which, in turn, referred to Minister of National Revenue v. Algoma Central Railway, [1968] 1 S.C.R. 447 at p. 449, 68 D.L.R. (2d) 447 (Algoma Central cited to S.C.R.), B.P. Australia Ltd. v. Commissioner of Taxation of Commonwealth of Australia, [1966] A.C. 224, [1965] 3 All E.R. 209, Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634, Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337 (Sun Newspapers), British Insulated and Helsby Cables v Atherton, [1926] A.C. 205 (British Insulated) per Viscount Cave, Ikea Ltd. v. Canada, [1996] 3 C.T.C. 307, 96 D.T.C. 6526 (F.C.A.) (Ikea cited to D.T.C.) and Morguard Corporation v. Canada, 2012 FCA 306, [2013] 1 C.T.C. 238 (Morguard).
[21] The Court then summarized its review of the jurisprudence to that point as follows:
In light of the above, expenses can be classified by reference to their form (recurring or single outlay), effect (enduring benefit) or purpose. Because expenses can be incurred for a myriad of reasons, the courts have cautioned that the aforementioned tests must be applied on a case-by-case basis. In other words, there is no set formula as to their application. The courts must apply a common-sense approach, taking into account the particular facts and circumstances surrounding the expense in issue and considering what the expense is calculated to effect from a practical and business standpoint.
Reasons at para. 79
[22] The Court then turned to a consideration of expenses incurred in the decision-making or oversight process in the context of a possible capital transaction. In the course of that review, it referred to Bowater Power Co. Ltd. v. Minister of National Revenue, [1971] F.C. 421, 71 D.T.C. 5469 Bowater (cited to F.C.) as well as Wacky Wheatley’s TV and Stereo Ltd. v. Canada (Minister of National Revenue), [1987] 2 C.T.C. 2311, 87 D.T.C. 576. It also noted Canada Revenue Agency, Interpretation Bulletin IT-475, “Expenditures on Research and for Business Expansion” (31 March 1981) in which the Minister stated his view that:
Expenditures made as part of a taxpayer’s ordinary business operations in respect of research to determine whether a capital asset should be created or acquired, but which themselves are not directly linked to the creation or acquisition of a capital asset, are current operating expenses which are deductible in the year incurred.
[23] The Tax Court acknowledged Alcan’s argument that Oversight Expenses are deductible as current expenses in the United Kingdom, based upon a section of the Income and Corporation Taxes Act 1988 (U.K.), 1988, c. 1, which provides for the deductibility of “expenses of management” at sections 75 and 76, a phrase which is not defined in the legislation.
[24] The Tax Court noted the Minister’s reliance upon Neonex International Ltd. v. Canada, [1978] C.T.C. 485, 78 D.T.C. 6339 (F.C.A.) (Neonex cited to C.T.C.), Rona Inc. v. Canada, 2003 TCC 121, 2003 D.T.C. 264 (Rona), and Firestone v. Canada, [1987] 3 F.C. 200, 87 D.T.C. 5237 (F.C.A.) (Firestone cited to F.C.).
[25] The Tax Court noted that Neonex, Rona and Firestone did not specifically deal with expenses incurred to assist board members in the oversight and decision-making process. Furthermore, Neonex and Firestone were decided before Ikea, which underlined the importance of the purpose test in the context of the taxpayer’s business.
[26] The Court’s conclusions with respect to the Oversight Expenses as they relate to the Pechiney transaction are summarized at paragraph 98 of its reasons:
I conclude that Oversight Expenses are deductible by the Appellant. The evidence shows that Oversight Expenses are of a frequent and recurring nature for this taxpayer. More importantly, the Oversight Expenses are deductible because they were incurred to facilitate the board of directors’ oversight over the income-earning process, which includes, as noted earlier, oversight over the allocation of capital. Ineffective oversight by directors has a destructive domino effect for a corporation; it is a pathway to poor decision-making, which in turn leads to poor earnings, which then results in poor share price performance. In this regard, the Appellant’s Oversight Expenses form part of the Appellant’s annual costs of business.
(my emphasis)
[27] The Court then ruled that 65% of the fees paid to Morgan Stanley and 35% of the fees paid to Lazard Frères in relation to the Pechiney transaction were deductible pursuant to subsection 9(1) of the Act as Oversight Expenses: Reasons at paras. 100 and 102. As for the Novelis transaction, the Court found that 88.69% of the fees paid to Lazard Frères for financial advice in the course of the oversight process were deductible as Oversight Expenses: Reasons at para. 107. Morgan Stanley’s fees in relation to that transaction were mostly deducted in the 2004 taxation year which was statute-barred at the time the audit in respect of that transaction commenced, and were therefore not challenged by the Minister.
[28] The Court then addressed the Advertising Fees, that is, the fees paid to Publicis Consultants (Publicis) and Valmonde & Cie (Valmonde), two public relations firms. Alcan claimed that these fees were deductible as a current expense because advertising fees should benefit from the broad principle of deductibility. Alcan also contended that one of the objects of the advertising services provided by Publicis was the development of a market for the shares of its capital stock that it issued as partial consideration for the Pechiney shares.
[29] The Tax Court rejected these submissions and found that the underlying purpose of the Publicis fees was to facilitate the implementation of the Pechiney transaction by heading off possible political and public relations issues which might derail the transaction, given Pechiney’s special status (“joyau technologique”) in France. Publicis was retained to anticipate opposition to the transaction by promoting Alcan as a “good steward” of Pechiney’s operations: Reasons at paras. 112–113, 117 and 119.
[30] The Tax Court also found that the amounts paid to Valmonde were for ancillary services in relation to its public relations strategy and were incurred in the execution of its takeover bid. In the end result, the Tax Court found that the Advertising Fees were incurred to facilitate the execution of the Pechiney transaction and were therefore not deductible as current expenses.
[31] The Tax Court then considered whether various reporting fees were deductible, either pursuant to subsection 9(1) or subparagraph 20(1)(g)(iii) of the Act. These fees were incurred for printing and issuing documents to Pechiney shareholders and to Alcan’s shareholders with respect to the Novelis transaction.
[32] As regards the Pechiney transaction, the Tax Court rejected the argument that the Reporting Fees were deductible pursuant to subsection 9(1) because, in its view, the provision of the information in the documents was an essential step in Alcan’s implementation of its takeover bid: Reasons at para. 133. As a result, it found that the fees for the preparation and filing of the documents were capital in nature. As regards the Novelis transaction, the Tax Court came to the same conclusion concerning the capital nature of the Reporting Fees.
[33] In deciding as it did, the Tax Court distinguished Boulangerie St-Augustin Inc. v. The Queen, [1995] 2 C.T.C. 2149, 95 D.T.C. 164 (T.C.C.), aff’d (1996), 206 N.R. 241, 97 D.T.C. 5012 (F.C.A.) (Boulangerie St-Augustin). In that case, the Tax Court decided that business people considered expenses incurred for preparing management circulars in the event of a takeover bid were necessary business expenses, on the same basis as preparing annual reports. In the present case, the Tax Court distinguished Boulangerie St-Augustin on the basis that Boulangerie St-Augustin was dealing with its own shareholders whereas Alcan was required to prepare and circulate the prospectus-like documents for Pechiney shareholders’ use in deciding whether or not to accept Alcan’s offer. The preparation and circulation of this information was an essential step in the implementation of Alcan’s takeover bid and therefore non-deductible as pursuant to subsection 9(1).
[34] Having found that the Reporting Fees were not deductible pursuant to subsection 9(1), the Court turned its attention to the question of whether those outlays were deductible pursuant to subparagraph 20(1)(g)(iii) which, in its material parts, provides as follows:
20 (1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
20 (1) Malgré les alinéas 18(1)a), b) et h), sont déductibles dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un bien pour une année d’imposition celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qu’il est raisonnable de considérer comme s’y rapportant :
…
…
(g) where the taxpayer is a corporation,
g) lorsque le contribuable est une société :
…
…
(iii) an expense incurred in the year in the course of printing and issuing a financial report to shareholders of the taxpayer or to any other person entitled by law to receive the report;
(iii) une dépense engagée durant l’année à l’occasion de la publication et de l’envoi d’un rapport financier aux actionnaires du contribuable ou à toute autre personne qui a le droit, selon la loi, de recevoir un semblable rapport ;
[35] In Boulangerie St-Augustin, the Tax Court held that for the purposes of subparagraph 20(1)(g)(iii), a “financial report” corresponds to an annual report, that is, a report addressing a corporation’s financial situation, generally including financial statements and often officers’ comments on the corporation’s activities: see Boulangerie St-Augustin at para. 21. Alcan argued that the documents in its case were required to be filed with regulatory authorities and provided to Pechiney’s shareholders. These documents were financial in nature, containing historical financial data and pro forma financial statements, as well as other information. Given that Pechiney shareholders were entitled to receive this information, Alcan argued that the conditions for the application of subparagraph 20(1)(g)(iii) were satisfied.
[36] The Tax Court found that the evidence was insufficient to allow it to come to accept Alcan’s submissions. It noted that no one who provided services in connection with the financial information was called to testify. As a result, the Court was “unable to discern whether these expenses were incurred specifically for the purpose of printing financial information and issuing it to [Alcan’s] shareholders or to the Pechiney shareholders”: see Reasons at para. 135. In addition, the Tax Court noted that the documents contained much more than financial information: Reasons at para. 136.
[37] Insofar as the reporting requirements with respect to the Novelis transaction was concerned, the Court noted that Alcan had not met its evidentiary burden of demonstrating deductibility pursuant to subparagraph 20(1)(g)(iii) as no evidence was called to allocate the costs between pages containing financial information and those containing other information. The Court also relied upon the fact that no one was called from the accounting firms involved, PwC and Ernst & Young, to explain the work they performed and the breakdown of their fees.
[38] As a result, the Tax Court ruled that the Reporting Fees were not deductible pursuant to subparagraph 20(1)(g)(iii) of the Act.
[39] The last issue dealt with by the Tax Court which is material to this appeal is the deductibility of the investment bankers’ fees pursuant to paragraph 20(1)(bb) of the Act which is reproduced below:
20 (1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
20 (1) Malgré les alinéas 18(1)a), b) et h), sont déductibles dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un bien pour une année d’imposition celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qu’il est raisonnable de considérer comme s’y rapportant :
…
…
(bb) an amount, other than a commission, that
bb) une somme, autre qu’une commission, qui, à la fois :
(i) is paid by the taxpayer in the year to a person or partnership the principal business of which
(i) est versée par le contribuable au cours de l’année à une personne ou à une société de personnes dont l’activité d’entreprise principale consiste :
(A) is advising others as to the advisability of purchasing or selling specific shares or securities,
(A) soit à donner des avis sur l’opportunité d’acheter ou de vendre certaines actions ou valeurs mobilières,
(ii) is paid for
(ii) est versée:
(A) advice as to the advisability of purchasing or selling a specific share or security of the taxpayer,
(A) soit pour obtenir un avis sur l’opportunité d’acheter ou de vendre certaines actions ou valeurs mobilières du contribuable,
[40] Alcan made this argument in the alternative, in the event that its position with respect to subsection 9(1) was not accepted by the Tax Court. The latter also considered the argument in the alternative, in the event that its conclusions with respect to the deductibility of its investment bankers’ fees pursuant to subsection 9(1) were not accepted by this Court.
[41] All agreed that a deduction was available pursuant to this provision only if:
(a) The amounts paid are not commissions;
(b) The fees were paid for advice as the advisability of purchasing or selling specific shares; and
(c) The fees were paid to a person whose principal business is advising others as to the advisability of purchasing or selling specific shares.
[42] Because the parties agreed that Morgan Stanley and Lazard Frères both met the third criterion, that is their principal business involved advising others as to the advisability of purchasing or selling specific shares, the discussion focussed on the other two criteria.
[43] The first issue was whether the amounts in question were commissions, a term which is not defined in the Act. On this issue both parties relied on the same Tax Court decision, ITA Travel Agency Ltd. v. Canada, [2001] G.S.T.C. 5, 2001 G.T.C. 258 (WL) (ITA Travel cited to G.S.T.C.), though each relies upon a different portion of the case. Alcan argued, on the basis of paragraphs 34 to 38 of ITA Travel, that “commission” meant an amount calculated by reference to a percentage of the price of a product or a percentage of the profit earned by a principal in connection with a transaction. The Tax Court agreed with Alcan that the bankers’ fees with respect to the Pechiney transaction were not determined on the basis of a percentage on sales or volume.
[44] The Minister, on the other hand, relied on paragraph 41 of ITA Travel which, on the basis of the Privy Council’s decision in Campbell v. National Trust Co. Ltd., [1931] 1 W.W.R. 465, [1931] 1 D.L.R. 705 (Campbell cited to D.L.R.), left open the possibility that a commission might be a lump sum rather than a percentage.
[45] The Tax Court rejected the Minister’s argument. It found that the possibility of a lump sum “commission” in Campbell was a function of the peculiarities of the transaction, specifically that the parties had in mind that the “commission” in that case would be a lump sum. The Tax Court concluded that, given the context in which “commission” is used in the legislation, there was no reason to depart from the ordinary meaning of that word.
[46] The second condition for a payment to be deductible pursuant to paragraph 20(1)(bb) is that the payment must have been made for advice with respect to the sale of shares. The parties’ disagreement turned on the fact that the English version of the legislation refers to “specific shares” while the French version speaks of “certaines actions”. This led the Minister to argue that this provision did not apply to the purchase of all the shares of an issuer.
[47] The Tax Court quoted at length from the Supreme Court’s decision in R. v. Daoust, 2004 SCC 6, [2004] 1 S.C.R. 217, concluding that the principles of bilingual statutory interpretation require that a discrepancy between the two versions of legislation should be resolved by an interpretation which incorporates the common meaning. The Court was of the view that “specific shares” and “certaines actions”, which it translated as “some shares”, do not have the same meaning because “specific shares” is more restrictive.
[48] The Tax Court rejected the Minister’s argument that “certaines actions” (“some shares”) does not include all of the shares of an issuer. In the Tax Court’s view, this interpretation gives effect only to the French version of the provision. It preferred the interpretation in which a deduction would be available where the investment advice “concerns shares of a particular issuer”: Reasons at para. 159. The Tax Court reasoned that, in this interpretation, all of the shares of a particular issuer are “some shares” in the sense that there remain shares of different issuers that a taxpayer could acquire.
[49] Given that it was satisfied that the conditions set out in subparagraph 20(1)(bb)(iii) were met, the Tax Court found that the investment bankers’ fees incurred in obtaining advice as to whether to proceed with the Pechiney transaction were deductible pursuant to that provision but only to the same extent as it had determined in its section 9 analysis: Reasons at para. 164.
[50] The Tax Court then addressed the application of paragraph 20(1)(bb) to the Novelis transaction. The Minister had refused the deduction of Lazard Frères’ fees on the basis that they were incurred in relation to the disposition of Alcan’s rolled products division and not with respect to a sale of shares. The Tax Court found, on the basis of the documentary evidence as to the work done by Lazard Frères, as well as the characterization of the transaction in an advance ruling that it was in fact a share transaction: Reasons, at paras. 168, 170.
[51] The next question, namely whether Lazard Frères’ fees were a commission, arose because of the formula for the calculation of those fees. Lazard Frères was to be paid on a sliding scale based on the difference of the Base Enterprise Value of “Rollco” and the Aggregate Value of the Rollco Transaction. As the difference increased, the fees owing to Lazard Frères increased up to a fixed maximum. The Tax Court found that the fees payable to Lazard Frères had nothing to do with the consideration received by the appellant and that, in any event, Lazard Frères did not act as Alcan’s agent in providing advice with respect to the transaction: Reasons at para. 173. As a result, the fees paid to Lazard Frères in connection with the Novelis transaction were not a commission.
[52] In addition, the Tax Court also found that the services provided by Lazard Frères prior to the approval of the spin-off transaction were advice with respect to the shares, specifically the Archer shares: Reasons at para. 170. To that extent, the conditions of paragraph 20(1)(bb) were satisfied with respect to Lazard Frères’ fees for the Novelis transaction.
[53] As a result, in the event that the fees paid to Lazard Frères were a capital expenditure—and not a current expense as found by the Court—the amount of those fees, to same extent as had been determined in the subsection 9(1) analysis, were deductible pursuant to paragraph 20(1)(bb) of the Act: Reasons at para. 174
[54] As for Morgan Stanley’s fees with respect to the Novelis transaction, the Tax Court found that the evidence was insufficient to allow it to determine if Morgan Stanley’s advice was given with respect to the advisability of selling a specific Alcan share. As a result, it held that those amounts were not deductible pursuant to paragraph 20(1)(bb): Reasons at para. 175.
IV. ISSUES
[55] Given that there is both an appeal and a cross-appeal, there are two sets of issues.
[56] The Minister appeals from the Tax Court’s finding that Oversight Expenses were current as opposed to capital expenses. Since these findings turn on the distinction drawn by the Tax Court between Oversight Expenses and Execution Costs, the essence of the Minister’s appeal is that the Tax Court erred in law in failing to give effect to the jurisprudence relating to the distinction between capital and current expenditures.
[57] The Minister also appeals the Tax Court’s alternative finding that if the investment bankers’ fees were capital in nature, they were nonetheless deductible pursuant to paragraph 20(1)(bb) of the Act, which provides for the deductibility of fees paid for investment advice.
[58] Alcan appeals from the Tax Court’s dismissal of its appeal with respect to the deductibility of Reporting Fees and Advertising Fees. Alcan’s position is that these fees were deductible pursuant to subsection 9(1) of the Act. To that extent, Alcan is arguing that the Tax Court erred in its appreciation of the evidence in relation to those expenses. In the alternative, Alcan argues that the Reporting Fees were deductible pursuant to subparagraph 20(1)(g)(iii) as fees incurred for printing and issuing a financial report to shareholders and others entitled at law to receive such a report.
V. ANALYSIS
A. Standard of review
[59] Since this is an appeal from a decision reached after a trial, the standard of review is that set out in Housen v. Nikolaisen, 2002 SCC 31, [2002] 2 S.C.R. 235 (Housen), namely, correctness for questions of law and palpable and overriding error for questions of fact and questions of mixed fact and law, except where it is possible to identify an extricable error of law in which case the standard of review for that question is correctness.
B. Current expenses vs expenses on account of capital.
[60] The Minister’s position before this Court, as it was before the Tax Court, is that this case falls to be decided according to the established jurisprudence dealing with the distinction between current and capital outlays.
[61] In my view, the Tax Court’s analysis does not depart from the principles set out in the jurisprudence. The Tax Court made a series of factual findings which bring the case within a line of existing jurisprudence. While the expression “Oversight Expenses” may be novel, the reasoning which led the Tax Court to its conclusion is not.
[62] The Tax Court found that Alcan has a long history of entering into major acquisitions and other transactions for the purpose of increasing revenues, earnings and economic value. It noted that Alcan sold alumina and other partially manufactured products to distribution and manufacturing subsidiaries throughout the world. It also sold its products to independent distributors and manufacturers: Reasons at para. 181. It received management fees for management services provided to its subsidiaries and also received dividends from the latter: Reasons at para. 9.
[63] In light of Alcan’s numerous acquisitions prior to the Pechiney transaction, a careful evaluation of corporate opportunities “appears to have been an ongoing quest for [Alcan’s] directors and was intrinsically linked to the income-earning process”: Reasons at para. 96. Outlays of this kind were of a frequent and recurring nature for Alcan and formed part of its annual costs of business: Reasons at para. 98.
[64] The Tax Court’s factual conclusions support the proposition that a core feature of Alcan’s business model included the acquisition of corporations for the purpose of generating revenue, increasing its income and adding to shareholder value.
[65] To that extent, the Pechiney and Novelis transactions touch upon factors incorporated into the tests for distinguishing between capital and current expenses. The Tax Court found that Oversight Expenses were a recurring item in Alcan’s business. This touches upon the Recurring Expense test. The Tax Court also found that Oversight Expenses were incurred for the purpose of generating revenue as part of the income earning process. This is consistent with the Underlying Purpose test articulated by Australia’s High Court in Sun Newspapers, which the Tax Court summarized as follows
… if an expense is incurred with respect to a matter related to the income earning process, this suggests that it was incurred on current account. In contrast, an expenditure is capital in nature if it is incurred as part of the actual implementation of a transaction that results in the acquisition of a capital asset or the creation, enhancement, or expansion of a taxpayer’s business.
(my emphasis, Reasons at para. 77)
[66] Similar language can be found in the Supreme Court’s decision in Ikea, though the issue there was on the receipt side of the ledger rather than the expense side. In considering whether a tenant inducement payment (TIP) was a capital or an income receipt, the Supreme Court commented that Bowman J. (as he then was) reached the conclusion that it was on account of income “based upon a total analysis of the role of the TIP in the business operated by Ikea and of the purposes for which it was negotiated and obtained”: Ikea at para. 28.
[67] The Minister relies upon the Enduring Asset test set out in British Insulated but the jurisprudence supports the proposition that expenses incurred in the course of exploring capital transactions are not invariably capital expenses.
[68] In Bowater, the issue was the deductibility of the engineering fees incurred by the taxpayer in deciding whether to construct capital works to increase its power generation capacities to meet anticipated increases in demand. Ultimately, the taxpayer decided not to proceed with construction but sought to deduct the engineering fees as current expenses. The Minister disallowed the fees as outlays on account of capital.
[69] The Federal Court, per Noël A.C.J., made two points of interest in allowing the deduction of the engineering fees. The first is that “[i]n distinguishing between a capital payment and a payment on current account, regard must always be had to the business and commercial realities of the matter”: see Bowater at p. 443. The business realities of the matter surely include the nature of the taxpayer’s business.
[70] The second point is material to the role of capital-related expenses in terms of the taxpayer’s business:
I do not indeed feel that merely because the expenditure was made for the purpose of determining whether to bring into existence a capital asset, it should always be considered as a capital expenditure and, therefore, not deductible. […] While the hydro-electric development, once it becomes a business or commercial reality is a capital asset of the business giving rise to it, whatever reasonable means were taken to find out whether it should be created or not may still result from the current operations of the business as part of the every day concern of its officers in conducting the operations of the company in a business-like way.
Bowater at p. 443.
[71] The first proposition is relevant because it underlines the fact that the capital/income distinction is not an abstract exercise but rather must be undertaken in light of the taxpayer’s business and commercial realities. (“[…] regard must be had to the business and commercial realities of the matt