HSBC Bank Canada v. The Queen

HSBC Bank Canada v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2010-09-08
Neutral citation
2010 TCC 462
File numbers
2006-3579(IT)G
Judges and Taxing Officers
Campbell J. Miller
Subjects
Income Tax Act
Decision Content
Docket: 2006-3579(IT)G
BETWEEN:
HSBC BANK CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motions presented on written submissions
By: The Honourable Justice Campbell J. Miller
Signatories:
Counsel for the Appellant:
Edwin G. Kroft, Q.C.
Counsel for the Respondent:
John Shipley and Justine Malone
____________________________________________________________________
AMENDED ORDER
IT IS HEREBY ORDERED that:
1. The Appellant shall, pursuant to subsection 83(1) of the Tax Court of Canada (General Procedure) Rules (the "Rules"), disclose and produce for inspection on or before October 22, 2010 all relevant documents in the possession, control or power of its Parent affiliated corporations (HBAP, HHBV and HGHQ), including but not limited to those documents identified in Requests 1, 11, 12, 15, 26, 27, 28, 29, 31, 32, 33, 35, 36 and 48, from Schedule A to the Respondent’s Notice of Motion. This should provide considerable guidance to the Parties as to what the Court considers relevant for purposes of this Rule 83(1) production order.
2. Such production of documents shall be subject to the provisions of the Confidentiality Order of April 27, 2010.
3. The Appellant shall, pursuant to section 110 of the Rules, have its nominee reattend examinations to answer the following questions from the list of 48 Requests in Schedule A to the Respondent’s Notice of Motion: Requests 1, 2, 3, 6, 7, 9, 11, 12, 13, 14, 15, 18, 20, 21, 22, 26, 28, 31, 32, 33, 38, 41, 45, 46, and 48, and any proper questions arising from the answers. The following Requests have already been answered or need not be answered: Requests 4, 5, 8, 10, 16, 17, 19, 25, 29 (re: the Appellant only), 34, 35 (re: the Appellant only) 37, 39, 40, 44 and 47.
4. With respect to Request 23, the Appellant shall advise the Respondent of the efforts taken to locate the missing financial statements.
5. With respect to Request 24, the Appellant shall provide updates received by the Board for the relevant period in terms of credit issues and credit quality.
6. With respect to Request 27, the Appellant shall provide internal risk assessment reports of both the Appellant and the Parents. Further, only if the Parents have in their possession external reports, such as DBRS, S&P or Moodys are they required to produce them; otherwise the Respondent shall be required to make its own inquiries.
7. With respect to Request 29, as it pertains to the Parents, the Appellant shall provide such external information only if already compiled by it.
8. With respect to Request 36, as it pertains to the Parents, the Appellants shall provide such information that it can obtain from materials presented at the Parents’ Board meetings or from the Parents’ files of those employees involved directly with the guarantees and their ongoing scrutiny.
9. With respect to Request 42, the Appellant shall provide the final version of the draft HKBC guarantee, and shall answer question 805, if it is able to locate Mr. Atkinson.
10. With respect to Request 43, the Appellant shall provide the letters in response to undertaking number 60 in unredacted form.
11. All documents required to be produced pursuant to paragraphs 3 through 10 of this Order, including but not limited to documents arising from Requests 5, 6, 9, 10, 21, 22, 24 and 27 shall be produced by the Appellant on or before October 12, 2010.
12. Costs for the Respondent in any event of the cause except for incremental costs arising from the personal attendance of the expert witnesses for their cross‑examination.
Signed at Ottawa, Canada, this 16th day of September 2010.
"Campbell J. Miller"
C. Miller J.
Citation: 2010TCC462
Date: 20100908
Docket: 2006-3579(IT)G
BETWEEN:
HSBC BANK CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Miller J.
[1] The Respondent seeks an order:
i) directing the Appellant, pursuant to section 110 of the Tax Court of Canada (General Procedure) Rules (the "Rules"), to answer the questions listed in Schedule "A" to the Respondent’s Notice of Motion, a total of 48 Requests, and any proper questions arising from the answers given by the Appellant;
ii) directing the Appellant, pursuant to subsection 83(1) of the Rules to disclose all relevant documents in the possession, control or power of its affiliated corporations and to produce for inspection all such documents;
iii) directing the Appellant pay all costs of this motion, apart from the incremental costs arising from the personal attendance of the Respondent’s expert witnesses for their cross-examination, forthwith and in any event of the cause. Further, the Respondent, if successful, wants to receive the documents by October 11, 2010.
[2] The Appellant challenges all 48 Requests for a variety of reasons:
- already answered
- relevance, including failure of Respondent to establish an appropriate factual paradigm
- fishing expedition
- speculative
- improper third party request
[3] Before addressing these areas of challenge and specifically the 48 Requests, I will reiterate certain principles, applicable to this case, which I set out in dealing with the Appellant’s request to compel: the principles applicable to this Motion are:
a) relevancy on discovery must be broadly and liberally construed and wide latitude should be given;
b) a motion’s 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) a motion judge’s 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 a witness or delay the case should not be permitted;
e) the threshold test for relevancy on discovery is very low but it does not allow for a fishing expedition;
f) 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;
g) the Court should preclude questions that are clearly abusive, clearly a delaying tactic or clearly irrelevant.
[4] The Parties agree that two additional principles of discovery come into play on this motion:
a) it is somewhat abusive of the discovery process for a party to require the other party to expend great time and effort to obtain information within the examining party’s "means of knowledge"; and
b) questions which are too general need not be answered. "Discovery" should not become the objective of the discovery process such that the goal is to uncover as much as possible from the party being examined however marginally relevant.
[5] There is no disagreement with respect to these principles, but it is in the application of the principles that the Parties diverge.
[6] These principles have been amply reviewed by myself and others and need no further discussion. I do however wish to consider in more detail the question of the propriety of third party requests in the context of Rule 83 and Rule 95 and also the assertion by the Appellant that the Respondent has not established the appropriate factual paradigm, which goes to the issue of the relevance of some of the requests.
[7] The Respondent asserts that the Appellant should be ordered to provide information relating to the Appellant’s affiliated companies (the "Parents"), relying for authority on the cases of Her Majesty the Queen v. Crestbrook Forest Industries Limited[1], Monarch Marketing Systems Inc. v. Esselte Metro Ltd.[2] and Michelin North America (Canada) Inc. v. 9130-4550 Québec Inc.[3].
[8] I will consider these cases in applying my discretion in the application of Rule 83 which reads:
(1) The Court may direct a party to disclose all relevant documents in the possession, control or power of the party’s subsidiary or affiliated corporation or of a corporation controlled directly or indirectly by the party and to produce for inspection all such documents that are not privileged.
(2) The direction under this section may be limited to such documents or classes of documents, or to such of the matters in question as may be specified in it.
There is no question that Honkong and Shanghai Banking Corporation Limited ("HBAP"), HSBC Holdings BV ("HHBV") and HSBC Holdings PLC ("HGHQ") (collectively the "Parents") are affiliated corporations of the Appellant.
[9] The Federal Court of Appeal stated the following in Crestbrook:
…
However, in Monarch Marketing Systems Inc. v. Esselte Metro Ltd. (1983), 75 C.P.R. (2d) 130, Mahoney, J. (as he then was), in ordering a corporate officer to answer questions in a patent action concerning matters in the knowledge of foreign affiliated companies, referred to a most important consideration which in my opinion must be taken into account in modern business litigation. At page 133, he said:
Today's commercial reality, with international corporations, large and small, doing business through affiliates across much of the world and treating national boundaries as minor inconveniences to be coped with by international organizations, dictates that the corporate veil ought not be permitted to inhibit the administration of justice in Canada. Examination for discovery is an important tool in the administration of justice on its civil side. I have no doubt that, under proper sanctions by the court, Canadian companies can readily and economically obtain from their foreign affiliates answers to proper questions on discovery. I am convinced that they should be required to try and pay the consequences of their failure or their affiliates' recalcitrance. International businesses ought not be permitted, either as an incident or object of their organizational set-ups, to avoid full compliance with the law of Canada in respect of the business they do here.
In my view what Mahoney, J. said was consistent with the philosophy underlying Rule 465 (and its successor, Rule 455). In the appropriate circumstances, this Court does have the power to require the sort of answers sought by the Crown here, but the Court will only do so in special situations, where it is shown as a prerequisite that it is in the interests of the administration of justice to look behind the sanctity of the corporate identity. To the extent, therefore, that the decision of the Court in Indalex is in conflict with that in Monarch Marketing Systems v. Esselte Metro, the latter should be taken as the correct statement of the law on this issue.
This power, while for understandable reasons used by the courts only sparingly, has been recognized for some time. …
[10] In Michelin, Justice Tremblay-Lamer stated:
…
21 I am aware that Crestbrook, supra, stands for the proposition that ordering a party to answer questions for which knowledge lies with third party affiliates is an exceptional power that must only be used when the interest of justice so dictates. This is one such situation.
22 I do not accept the plaintiff's argument that the defendants ought to avail themselves of more appropriate procedural channels to discover those known to possess the relevant information, for the reasons addressed in Crestbrook, supra, and Eli Lilly, supra. Having the plaintiff obtain information from related third party entities does not circumvent the procedure for examining assignors and non-parties set out in Rules 237 and 238. Rather, this offers a practical solution given the commercial reality of international and affiliated corporations, and the challenges faced by parties in seeking information in this context. Nor do I accept the plaintiff's contention that the defendants want this information only to support blunt allegations of design functionality. References to functionality are apparent, among other ways, from the plaintiff's own promotional materials. A clear foundation for functionality exists.
…
I could not agree more with Justice Tremblay-Lamer’s attitude of seeking a practical approach to obtaining proper information.
[11] The Appellant argues that there are no special circumstances here justifying these requests for information from the Parents. With respect, I disagree.
[12] The emphasis in considering a request for information from the third party should be placed on assessing the question – what is in the best interests of justice in the context of an assessment by the Government of Canada in the circumstances of any particular case? In considering the request before me, I need to bear in mind that this is not just a transfer pricing case but there is also a paragraph 18(1)(a) of the Income Tax Act ("ITA") issue whether the non-arm’s length guarantee fee was paid for the purpose of earning income. From the perspective of both issues (payment for earning income and application of transfer pricing provisions), the role of the Parent guarantor, its economic position at the time, any existing guarantee or transfer pricing policies, indeed most of the information sought is integral to afford the trial judge a full understanding of the nature and substance of the guarantee arrangement. This is not a matter of an uninvolved Parent. This is, I find, a special situation of the Parent corporation intimately a part of the very matter before the Court. The trial judge will want to know why the Appellant paid what it did as well as what would be paid in an arm’s length situation. It is in the best interests of the administration of justice that both the Appellant and the Parents fully explain the circumstances surrounding the fee and provide relevant documentation.
[13] The Appellant raises another factor, relying on a comment from Justice Hugessen in Eli Lilly v. Apotex Inc.[4], cited in the Michelin case, that it is proper to require third party information only where one may reasonably expect that it will be honoured because of the relationship between the party and third party. The Appellant contends it would not be reasonable to expect a request would be honoured by the Parents with respect to highly sensitive information, such as the requirements of financial regulatory regimes governing the Parents, nor to documents that lack any connection with the Appellant (eg. other guarantees and comfort letters). Bringing the Parents’ documents under the protection of the Confidentiality Order issued in this case should address the Appellant’s first concern and alleviate any similar concern of the Parents. With respect to the request for documents to which the Appellant is not a party, I see the issue of reasonable expectation less in terms of the lack of connection as I do in terms of whether or not the document is indeed relevant. Given these views, I have no hesitation in concluding that it is reasonable to expect the Parents to respond positively to relevant inquiries. I see no impediment in exercising my discretion pursuant to Rule 83 to order production of relevant documents. This conclusion addresses all those challenges by the Appellant to the Requests based on documents not being in the Appellant’s possession or control, where such documents may be in the possession, control or power of the Parents.
[14] In reaching this conclusion, I recognize the parties disagree as to what is relevant. I will comment on the question of relevancy as I go through the 48 Requests. My intention is that my comments will help the parties determine relevance for purposes of the Rule 83 production.
[15] I want to also address the Appellant’s views on establishing the appropriate factual paradigm before ruling on relevancy. Getting to the heart of the Appellant’s concern is that information with respect to non-arm’s length dealings is not relevant because the so-called factual paradigm in a transfer pricing case should be limited, in this case, to arm’s length guarantors and arm’s length borrowers. The Appellant goes so far as to suggest I will have made an error in law if I permit the Respondent to obtain and use information concerning non-arm’s length transactions when such transactions do not involve the Appellant. While I appreciate that the transfer pricing provisions do not call for comparison with other non-arm’s length transactions, I can certainly see some relevance to how sister corporations were treated in connection with determining the issue of whether the fee was incurred for the purpose of earning income. Without having to determine the relevance of circumstances surrounding the implicit support of the Parent in connection with the transfer pricing, I find that such information is generally relevant in determining the question of whether the fee was incurred for the purpose of earning income.
[16] Taking these preliminary observations into account, I will now turn to each of the 48 Requests, indicating the request itself and the Appellant’s grounds for challenge.
1. Request
Request that the Appellant obtain from its parent company a copy of the transfer pricing policy prepared by HSBC Holdings PLC for the relevant taxation years.
Challenge
- the evidence does not support a finding of relevance
- the issue is not raised in the pleadings
- document not in the possession, control or power of the Appellant.
[17] In support of her motion the Respondent provided affidavits of two financial experts. The Appellant examined both the experts on their affidavits. The Appellant argues that the Respondent’s experts, Dr. Kane and Dr. van Deventer, were not able, upon such examination, to establish that such a request was warranted. I find no need to consider the experts’ views on this point. A transfer pricing policy prepared by HSBC Holding PLC is patently relevant in my view. The fact that such a policy may pertain to other subsidiary companies does not mean it was not applicable to the Appellant. While the policy itself is not referenced in the pleadings, I simply do not follow the Appellant’s argument that this is "information which was not raised in the pleadings". This seems to suggest that parties must plead evidence. Not so.
[18] In the case of Lloyd M. Teelucksingh v. Her Majesty the Queen[5], Justice Bowie set forth the principle that:
…
(i) Examination for discovery is an examination as to the information and belief of the other party as to facts that are relevant to the matters in issue, as defined by the pleadings.
…
So, is the Appellant’s Parent’s policy on transfer pricing relevant to a matter in issue, as defined by the pleadings? It seems self-evident that transfer pricing is a matter in issue – how could such a policy of one of the parties to the guarantee fee arrangement not be relevant to this matter in issue?
[19] Finally, the Appellant raises the arguments, already addressed in the context of Rule 83, concerning third party production. This document is captured by my section 83 ruling, but this is one of the instances that should give guidance to the Appellant for the Rule 83 production. I find this document specifically is relevant and must be produced.
Requests 2, 3, 4, 5, 6 and 7
2. Request that the Appellant ask the Parent company (HGHQ) to confirm that it provided guarantees and letters of comfort to non-UK group members (in relation to R-4).
3. Request that the Appellant ask the Parent company (HGHQ) whether it provided guarantees and letters of comfort to non-UK group members to satisfy local banking regulatory requirements (in relation to R-4).
4. Request that the Appellant enquire of its Parent to confirm that the approach taken by the Parent was accepted by Inland Revenue whereby letters of comfort, awareness and responsibility should not attract a charge for the period 1997 through 2000 (in relation to R-4).
5. Request that the Appellant enquire of its Parent to confirm that the approach taken by the Parent was accepted by Inland Revenue whereby there should be no charge in respect to guarantees of a capital nature for the period 1997 to 2000 (in relation to R-4).
6. Request that the Appellant enquire of its Parent to confirm that it has not been the practice to charge for guarantees of depositors and legally binding undertakings of support which contain explicit words of promise that the subsidiary will meet its obligations for such guarantees as has always been perceived that there’s no real commercial transfer of value as a result of guarantees being put in place (in relation to R-4).
7. Confirm that the Parent bank’s practice of having no intention to charge for such guarantees either retrospectively or going forward was carried out for at least the period 1997 through 2000 (in relation to R-4).
Challenge
- the information is not relevant for purposes of subsections 69(2) and 247(2) because the transactions are between non-arm’s length persons
- the evidence does not support a finding of relevance
- the question is a pure fishing expedition
- the Appellant is not required by the Rules to contact third parties for the information
- the issue is not raised in pleadings
[20] Exhibit R-4 in these proceedings is the HSBC "Transfer Pricing Review, updated January 2002". It claims "the guiding principle is that all cross-border transactions are to comply with the arm’s length standard". The Respondent contends, in light of this stated objective, that in assessing the reasonableness of the guarantee fee and whether reasonable efforts were taken to determine and use arm’s length prices, it is relevant not only to consider the policies of the HSBC Group, but whether they were applied consistently in practice and applied to the guarantee at issue. The Respondent argues that is what Requests 2 to 7 relate to. The answer to these questions may suggest either consistency or inconsistency. In the context of the transfer pricing issue it is not as readily apparent, as the Respondent contends, that the answers are relevant from a common sense appreciation of that issue. Yet the answers may shed light on the level of implicit support from the Parent to its subsidiaries, and consequently the determination of value of the fee to help answer the question – what would a subsidiary bank with implicit support pay for a third party guarantee? The answers to these Requests are not to demonstrate any arm’s length comparison as such, but to help establish the impact of this significant economic factor.
Requests 4 and 5, however, are unlike the others as they go to the U.K. treatment of guarantee fees. This does not pertain to the Canadian situation.
[21] The answers may also be relevant in addressing the paragraph 18(1)(a) of the ITA issue, as they also go to the issue of whether there was any value at all. I find the questions may be relevant. I do not see these questions as a fishing expedition. The Appellant is required to make the inquiries, other than with respect to Requests 4 and 5.
8. Request
Confirm whether the Parent bank took the position within Inland Revenue that no charges should be made for such guarantees and that some effort was made to resolve on the basis of 5 basis points for obligations subject to guarantee for the relevant taxation years.
Challenge
- the information is not relevant for purposes of subsections 69(2) and 247(2) because the transactions are between non-arm’s length persons
- the question is a pure fishing expedition
- the Appellant is not required by the Rules to contact third parties for the information
- the issue is not raised in pleadings
[22] Although this Request arises from Exhibit R-4, I see no relevance to any position the Parent took with Inland Revenue. This is a Canadian issue, not a U.K. issue.
9. Request
Provide the reason why the Parent treated the non-Canadian groups and the Appellant differently.
10. Request
If the difference in treatment relates to the contents of the guarantees being provided or the substance of the guarantees being provided by the Parent, have the parent produce copies of those guarantees or letters of comfort.
Challenge
- The information is not relevant for purposes of the subsections 69(2) and 247(2) because the transactions are between non-arm’s length persons
- The question is a pure fishing expedition
- The Appellant is not required by the Rules to contact third parties for the information
- The issue is not raised in pleadings
[23] Request 9 also arises from Exhibit R-4, specifically section 3.4.2.2, which describes the guarantee at issue. The question seeks the reasoning behind what on its face appears to be different treatment. This may be relevant, again not so much for purposes of any comparison between different non-arm’s length arrangements, but to get an understanding why the fee was incurred by the Appellant. Request 9 is answerable.
[24] Request 10 however goes solely to a comparison of the contents of the different non-arm’s length guarantees and adds nothing to the transfer pricing issue, nor to the paragraph 18(1)(a) of the ITA issue. It is simply going too far afield.
11. Request
Request to enquire of the Parent bank (HHBV) whether it has copies of the board papers referred to in the May 6, 1999 GEM about the renegotiation of the guarantee arrangements.
Challenge
- the Appellant is not required to contact third parties for information
- the document not in the possession, control or power of the Appellant
[25] As I have indicated at the outset, it is appropriate and in the interests of justice to seek answers from the Parents. The issue here is one of relevancy. The Appellant argues that this only goes to a comparison of a non-arm’s length transaction and is therefore irrelevant. I disagree. It may go to the very business essence of the guarantee, assisting in understanding the commerciality and value of that guarantee.
12. Request
Request for copies of the monthly and quarterly financial statements of the Parent companies (HBAP and HHBV) for the taxation years under appeal.
Challenge
- The Appellant provided, to the Respondent, the financial statements of HBAP (1996) and HHBV (1997 to 2000), which it located in its records on November 30, 2009
- the evidence does not support a finding of relevance
- the question is a pure fishing expedition
- documents not in the possession, control or power of the Appellant
[26] The Respondent relies on the experts’ affidavits to argue that the reasonableness of the fees depends on information about the financial viability of both the Appellant and the entities providing the guarantee. Further, that the value will depend on the creditworthiness and financial strength of both. The Appellant discounts the experts’ evidence for the following reasons:
a) the requests for information on based on "wish lists";
b) the requests for information have been made without Dr. Kane or Dr. van Deventer knowing what methodology might be used to value the guarantee fee;
c) the sweeping requests for information were made in an effort to support a precise or theoretically perfect price for the guarantee once a methodology is chosen; and
d) the requests for information are based on a paradigm which cannot be correct because it assumes that the Parents remain involved as the guarantors as well as shareholders.
[27] Having read the experts’ discovery, I disagree with the Appellant that such Requests represent wish lists. They represent reasonable efforts to determine a reasonable fee. Further, until asked to provide a report, the very little uncertainty as to methodology is inconsequential. Nor do I accept the Appellant’s categorization that the experts are really seeking some theoretically perfect price. This is more the Appellant’s take on the evidence than any such specific testimony by the experts.
[28] Finally, the Appellant argues the experts are proceeding on an incorrect paradigm – one where the Parents continue to provide the guarantee and remain as shareholders of the Appellant. The Appellant suggests the appropriate paradigm is a borrower with the profile of the Appellant who transacts with an arm’s length person guarantor. The borrower is a wholly owned subsidiary of a non-resident with the profile of the Parent. The Appellant suggests this paradigm takes account only of the explicit guarantee and does not provide for any element of implicit support of the Parent for the Appellant. I fail to see support for this proposition of the Appellant. If the Appellant’s paradigm has a borrower with a profile of the Appellant and a parent with a profile of the Parents in this case, then those profiles must address the financial strengths of each of them. And, consequently, there may be a question of implicit support of a hypothetical parent for a hypothetical subsidiary. The role of implicit support may well be an issue at trial (this may depend to some extent on the outcome of the General Electric Capital Canada Inc. v. Her Majesty the Queen[6] Appeal) but to rule it out as irrelevant at the stage of discovery is, I find, not appropriate.
[29] I want to be clear that I find this is relevant, and therefore producible in any event pursuant to Rule 83(1).
13. Request
Request of the Parent banks whether they conducted risk assessments of the Appellant during the relevant taxation years.
Challenge
- the evidence does not support a finding of relevance
- the Appellant is not required by the Rules to contact third parties for the information
[30] This is relevant in determining the commerciality of the guarantee and is answerable.
14. Request
Make enquiries of the Parent companies and advise what expenses were incurred by these Parents in monitoring the activities of the Appellant and which of these expenses were directly the result of the contractual obligation to the CDIC and guarantee of the Appellant’s deposits.
31. Request
Provide a complete record of the expenses that the Parents incurred in monitoring and controlling the Appellant during the years under appeal. Provide an explanation of which of the expenses were specifically occasioned by the guarantee in issue in this appeal. Provide a detail of the entity bearing the cost of these expenses.
Challenge
- the evidence does not support a finding relevance
- the question a pure fishing expedition
- the Appellant is not required by the Rules to contact third parties for the information
- documents not in the possession, control or power of the Appellant
[31] The Respondent relies on Dr. Kane’s affidavit in ascertaining the relevance is apparent, as Dr. Kane states that Parents incur expenses in monitoring and controlling their subsidiaries, and that specific expenses relating to the guarantee would affect the fair market value of the guarantee. The Appellant argues that even those specific expenses are of no relevance to an arm’s length guarantor. I disagree: such costs could well be a factor in the arm’s length guarantor’s determination of an appropriate fee. They certainly could be evidence of implicit support.
15. Request
Request for the funds transfer pricing policy for the years under appeal of the parent bank.
33. Request
Provide copies of internal policy documents or policies and procedures of the Appellant and the parents in respect of "funds transfer pricing" for the years under appeal.
Challenge
- the information is not relevant for purposes subsections 69(2) and 247(2) because the transactions are between non-arm’s length persons and within departments of a financial institution
- the evidence does not support a finding of relevance
- the question is a pure fishing expedition
- document not in the possession, control or power of the Appellant
[32] The Appellant argues this is irrelevant in a transfer pricing context as it relates only to non-arm’s length transactions. Yet, it is also the policy that would apply to the Appellants and would therefore provide some insight into implicit financial support. Given the low threshold for relevancy at the discovery stage, and given I have not been convinced of a clear irrelevancy, I find the requests are answerable.
16. Request
Determine whether it was the position of the Appellant that HBAP would not have provided the guarantee absent the explicit agreement that was entered into.
17. Request
Determine whether it was the position of the Appellant that HHBV and HSBC Holdings would not have provided the guarantee absent the explicit agreement that was entered into.
Challenge
- the question is a pure fishing expedition
- the Appellant is not required by the Rules to contact third parties
- the question calls for speculation and an opinion
[33] As I have indicated, the question of implicit support at this stage of the litigation cannot be ruled irrelevant. The Respondent argues basically that as implicit support is relevant, these questions are proper. I note that it was in paragraph 64 of the Respondent’s Reply where she raises additional facts in support of the assessment that one finds the statement: "The Appellant would have been fully supported by HBAP and HHBV even in the absence of the Deed of Guarantee." The Appellant argues that as a new argument from the Respondent, the Respondent should not be allowed to shift the burden to the Appellant by having the Court order it to answer "what if" questions. The Appellant maintains hypothetical questions calling for speculation and an expression of an opinion are not proper. I agree. It is for the trial judge to determine this key fact, based on a review of all of the evidence presented as to what occurred those many years ago. It does not follow that just because the question of implicit support may be relevant, the Appellant should be required to speculate regarding the ultimate issue pertaining to implicit support. This is unfair and improper. The facts relating to the respective financial strengths of parent and subsidiary, their respective policies and all other surrounding circumstances leading to the explicit guarantee will have to be assessed and weighed. An officer of the Appellant, 14 and 23 years after the fact hypothesizing to what might have been without a guarantee is simply not appropriate.
18. Request
Request for the sourcing of the information set out in A-1 Tab 102 for each taxation year under appeal.
19. Request
Provide the identity of the depositors (in the context of a question relating to how many of the 18$ billion deposits in 1996 were sourced from other banks and other entities within the Appellant’s corporation group).
20. Request
Provide the source of the attrition assumptions set out at Exhibit A-1, Tab 102 for the period 1997-200 and the identity of the depositors.
Challenge
- question answered
[34] The Exhibit referred to in this group of questions is the Appellant’s own analysis of the benefit of the guarantee. With respect to Request 18, the Appellant indicated in its November 30, 2009 correspondence to the Respondent that it was able to provide the answer. I am unclear, however, whether it has yet done so. Given the Confidentiality Order in this case, confidentiality should not be an issue. The Appellant should proceed to answer as it has indicated it will.
[35] With respect to Request 19, the Appellant advised the Respondent it searched its records but was unable to find the information. I accept this response, and so too should the Respondent.
[36] With respect to Request 20, the attrition rate used by the Appellant is significant in impacting the benefit. The Appellant does not appear to have addressed this. It is relevant and should be answered.
21. Request
Request for the financial information provided to the CDIC in 1999‑2000 for the purpose of establishing the Appellant’s rating category.
22. Request
Request for the quarterly and monthly financial information that would have been provided to OSFI during the period of 1996 to 2000.
Challenge
- the information is not relevant for purposes of subsections 69(2) and 247(2) because the financial information is not available to arm’s length persons for any purpose including the determination of an arm’s length guarantee fee
- the evidence does not support a finding of relevance
- the question is a pure fishing expedition
- the Respondent asked the Appellant to produce the monthly and/or quarterly filings that would have been given to OSFI during the period 1996 to 2000. As a courtesy to the Respondent, the Appellant provided financial statements, posted to the OSFI website, in the binder accompanying the Appellant’s 2010 undertaking response.
[37] The real concern here for the Appellant is the relevance of information that would not be available to a third party guarantor, as that is what is being requested. Clearly, any information provided by the Appellant to CDIC or OSFI that is in the public domain is not at issue. Why does the Respondent make these requests? Because, as she points out, "the issue in the appeal deals with the reasonableness of the price paid for a guarantee against the probability of its default. The analysis under sections 69 and 247 will require an examination, among other factors, of the financial strength, credit risk, leverage, risk exposures and default probabilities of the Appellant and its Parent corporations". The Respondent gets this language from Dr. van Deventer. The Respondent also refers to Dr. Kane’s affidavit where he states:
"Documents and information provided by the Appellant in fulfilling its obligations to the CDIC would be highly relevant to the assessing the value received, if any, from the explicit guarantee in this case.".
[38] The experts must bear in mind that the sections 69 and 247 analysis is a comparative one. It is one thing to suggest this information is helpful in assessing the value of the fee, but it is quite different to rely on it to determine what a third party would do without that information. The transfer pricing issue is not one of the value of the fee, but the reasonableness of the fee compared to an arm’s length fee. The arm’s length fee cannot be determined on the basis of information that an arm’s length party would not have. This does raise the intriguing question of whether the third party is deemed to have knowledge that the parent would have had notwithstanding in the real world it could not get that knowledge. My view is that one has to take the real world approach.
[39] However, the value of the fee to the Appellant would be influenced by this internal confidential information. Is "value" to the Appellant relevant? Yes, but not with respect to the transfer pricing issue, only with respect to the issue of whether or not the fee was paid to earn income. The Respondent should be careful in the use of experts’ testimony.
[40] Turning to the question of confidentiality, I do not understand the Appellant’s argument that legislation prohibits disclosure when the Confidentiality Order in this matter specifically defines confidential information as including information which is to be kept confidential pursuant to the CDIC Act and OSFI Act. Confidentiality is no bar to these Requests and they are to be answered, though not, as indicated, for the purposes of the transfer pricing issue.
23. Request
Request for copies of the financial information provided to the Parent bank on monthly or quarterly basis.
Challenge
- the Respondent asked for copies of the financial statements provided to the Parent bank on a monthly or quarterly basis. The Respondent did not ask for "financial information".
[41] I agree the Request is for financial statements not financial information. The Appellant has indicated it found some of these records, but has not been specific as to whether it searched for the balance. If it di