Univar Canada Ltd. v. The Queen

Univar Canada Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2005-11-03
Neutral citation
2005 TCC 723
File numbers
2002-4202(IT)G, 2002-479(IT)G
Judges and Taxing Officers
Ronald D. Bell
Subjects
Income Tax Act
Decision Content
Docket: 2002-479(IT)G
2002-4202(IT)G
BETWEEN:
UNIVAR CANADA
LTD .,
(formerly Vopak Canada Ltd.
Van Waters & Rogers Ltd.)
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
_______________________________________________________________
Appeal heard on
May 9, 2005 at
Vancouver ,
British Columbia
Before: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
Mr. E. Kroft
Ms. E. Junkin
Ms. Stacey Sloan
Counsel for the Respondent:
Mr. L. Chambers, Q.C.
Mr. R. Carvalho
_______________________________________________________________
AMENDED JUDGMENT
The appeal from the six
August 9, 2002 reassessments made under Part I of the Income Tax Act with respect to the following taxation years is allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment:
(1) taxation year ended
February 29, 1996 ;
(2) taxation year ended
July 15, 1996 ;
(3) taxation year ended
December 31, 1996 ;
(4) 1997 taxation year;
(5) 1998 taxation year;
(6) 1999 taxation year;
The appeal from the
September 3, 2002 reassessment for a penalty under subsection 162(1) for failure to file a return of income as and when required for the taxation year ended
July 15, 1996 , is allowed and the penalty is deleted.
The appeal from the
August 6, 2001 reassessment of Part XIII tax for the 1995 taxation year is allowed in accordance with the attached Reasons for Judgment.
This Amended Judgment is issued in substitution of the Amended Judgment dated November 4, 2005.
Signed at
Ottawa ,
Canada
, this 12th day of December 2005.
“R.D. Bell"
Bell
, J.
Citation:2005
TCC 723
Date: 20051103
Docket: 2002-479(IT)G
2002-4202(IT)G
BETWEEN:
UNIVAR CANADA
LTD .,
(formerly Vopak Canada Ltd.
Van Waters & Rogers Ltd.)
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell
, J.
General
The statutory provisions referred to herein are all in reference to the Income Tax Act (“Act”) unless otherwise stated.
ISSUES
I. In respect of the six
August 9, 2002 reassessments (“six reassessments”) of the Appellant for the following taxation years, namely:
taxation year ended
February 29, 1996
taxation year ended
July 15, 1996
taxation year ended
December 31, 1996
1997 taxation year
5. 1998 taxation year
1999 taxation year
could it be reasonably be considered that the principal purpose for the acquisition by the Appellant of shares of Van Waters & Rogers (Barbadosco) Ltd. (“Barbadosco”) was to permit the Appellant to avoid, reduce or defer the payment of tax that would otherwise be payable under the Act within the meaning of paragraph 95(6)(b) with the result that:
(a) Barbadosco would not be a foreign affiliate of the Appellant, and, therefore
(b) dividends received by the Appellant from Barbadosco would not be deductible under subsection 113(1)?
II. Alternatively,
(a) respecting the six reassessments,
(i) was there an “avoidance transaction” (subsection 245(3)), and, if so
(ii) by virtue of subsection 245(4) does subsection 245(2) not apply in that it may reasonably be considered that the transaction did not result directly or indirectly in
(i) a misuse of clause 95(2)(a)(ii)(A), respecting Part I tax,
or
(ii) an abuse having regard to the provisions of the Act read as a whole?
(b) respecting the
August 6, 2001 reassessment for non-resident tax under Part XIII for the 1995 taxation year,
(i) was there an “avoidance transaction” (subsection 245(3)), and, if so
(ii) by virtue of subsection 245(4) does subsection 245(2) not apply in that it may reasonably be considered that the transaction did not result in
(i) a misuse of subsection 15(2.2) respecting Part XIII tax, or
(ii) an abuse having regard to the provisions of the Act read as a whole?
III . Was the
September 3, 2002 reassessment for the taxation year ended
July 15, 1996 respecting a penalty under subsection 162(1) for failure to file a return of income as and when required and respecting the underlying tax, stature barred, having been made after the expiration of the normal reassessment period?
CONCLUSIONS
I have concluded that:
I. With respect to the six reassessments, it cannot, under paragraph 95(6)(b) reasonably be considered that the principal purpose for the acquisition of the shares of Barbadosco was to permit the Appellant to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under the Act.
II. With respect to the six reassessments, there was no avoidance transaction within the meaning of subsection 245(3).
III . With respect to the
August 6, 2001 reassessment there was no avoidance transaction within the subsection of 245(3).
IV. With respect to the
September 3, 2002 reassessment for a penalty under subsection 162(1), the appeal will be allowed.
REASSESSMENTS
For ease of understanding the reassessments the attached Appendix A showing transactions should be consulted.
[1] The Minister of National Revenue (“Minister”) issued original Notices of Assessment to the Appellant in respect of three 1996 taxation years (there having been three year-ends in that calendar year), and in respect of the 1997, 1998 and 1999 taxation years. For each of those taxation years, the Appellant included in its income dividends from Barbadosco and, pursuant to the provisions of subsection 113(1), deducted an equivalent amount.
[2] On
September 7, 2001 the Minister reassessed the Appellant for those six taxation years by adding, in each such year, an amount described as:
Interest Income from Univar Europe N.V.
No other adjustments to income having been made, it is apparent that the Minister simply added the aforesaid amounts characterized as interest, making no reference to the former dividend income inclusion and corresponding deduction. Each of the Notices of Reassessment bears the endorsement:
Section 245 of the Income Tax Act is a position related to this assessment.
Unfortunately, as is mostly the case, the Minister neglects to include a statement of the basis of reassessment. Subsequent information confirmed that the Minister’s basis for same was section 245.
[3] On
August 9, 2002 , the Minister again reassessed the Appellant for those six taxation years. Each Notice of Reassessment bears the following:
Adjustments to Active Business Income
Deduct:
Interest income previously assessed.
A notation on each such Notice of Reassessment reads as follows:
The section 113 dividend deduction previously allowed, is now denied pursuant to subsection 95(6) of the Act.
In the alternative, section 245 applies to include in income of Univar Canada Ltd. interest received by Van Waters & Rogers (
Barbados
) Ltd. from loans made to various non-Canadian companies.
As set out later, Barbadosco did not make such loans. It simply purchased the debt owed by those companies to UC.
[4] On
August 6, 2001 the Minister issued a Notice of Reassessment cancelling and replacing a Notice of Assessment dated
July 25, 2001 for the Appellant’s 1995 taxation year. The endorsement on the Notice of Reassessment reads as follows:
This “Notice of Reassessment” cancels and replaces “Notice of Assessment” No. 6161436 dated
July 25, 2001 . You had to deduct and remit $232,201.00 of non-resident Part XIII tax on amounts paid or credited to non-resident(s) of
Canada
.
As a result of this decrease, we have adjusted the arrears balance accordingly.
We charge interest at the prescribed rate on the unpaid balance.
This reassessment appears to have arisen from the Minister’s view of recharacterizing the within transactions to effect an assessment as a result of sections 15, 212, 214 and 215. Respondent’s counsel stated that:
The tax benefit was Univar Europe’s avoidance of its liability to pay, and the Appellant’s liability to deduct or withhold and remit to the Receiver General of Canada, the tax imposed on the indebtedness arising between Univar Europe and VWRB under Part XIII of the Income Tax Act, in particular, by a combination of subsections 15(2), 15(2.1), 15(2.2), 212(2), 214(3), 215(1) and 215(6) of the Act.
[5] On
September 3, 2002 , the Minister reassessed the Appellant for its taxation year ending
July 15, 1996 consisting of, in the words of the SUMMARY OF REASSESSMENT:
Penalties: Net balance
Subsection 162(1) late-filing penalty $27,351.10
This was the third reassessment for this taxation year.
The second reassessment dated
August 9, 2002 stated:
We have cancelled the late-filing penalty previously assessed under subsection 162(1) of the Income Tax Act.
This penalty is computed as a percentage of tax payable.
The first reassessment dated
September 7, 2001 reassessed a late-filing penalty under subsection 162(1).
GENERAL
[6] The parties submitted an AGREED STATEMENT OF FACTS with five charts showing companies in the international Univar group of corporations appended (“UC Group”). Those charts used several historical names of some companies [1] rendering the corporate structure difficult to comprehend. In addition, although I sought, at the beginning of the hearing, to gain agreement on the use only of the ultimate changed name and of a simple chart setting out readily identifiable names and the important facts, neither that chart nor those names were used at the hearing. To avoid reader confusion or early loss of interest I set forth a chart as Appendix A hereto and forming part of these Reasons virtually identical to that I presented in Court. It encapsules the corporate structure and the basic transaction facts in readily comprehensible fashion.
[7] The Court has no control over some aspects of the preparation and presentation of a case. However, some comments in respect of this appeal may be of assistance to counsel generally.
[8] The Minister of National Revenue (“Minister”) followed unusual assessing procedures in this matter. As set forth under REASSESSMENTS the Minister’s first reassessment of six of the Appellant’s taxation years, adding interest to its income, was based on section 245. The second reassessment, disallowing the subsection 113(1) dividend deduction, was based upon subsection 95(6) and, in the alternative, on section 245. Two other Notices of Reassessment were issued. One assessed a non-resident Part XIII tax for the Appellant’s 1995 taxation year. The other assessed a penalty for one of the Appellant’s three 1996 taxation years.
[9] The Appellant filed a Notice of Appeal respecting the aforesaid first reassessments and the withholding tax assessment. Then it filed another Notice of Appeal in respect of a second reassessment of the six taxation years and the late filing penalty reassessment. Obviously, the second reassessments, disallowing the subsection 113(1) deduction for those six taxation years, replaced the first reassessments in respect of those years. However, the Part XIII tax reassessment for 1995 contained in the first Notice of Appeal survived and had to be addressed in Court.
[10] The first Notice of Appeal contained 90 paragraphs, a substantial number of which were unnecessary. The form of Notice of Appeal prescribed by the General Procedure Rules requires that the Appellant relate the material facts relied on, specify the issues to be decided, refer to the statutory provisions relied on and set forth the reasons upon which the Appellant intends to rely. The Reply to that Notice of Appeal, although containing only 42 paragraphs, was not succinct and to the point.
[11] The second Notice of Appeal, containing 72 paragraphs, also lacked brevity and conciseness. The Reply containing 47 paragraphs suffered similarly.
[12] I raise these matters as a prelude to my statement that the content of the appeals and the reason for the continued existence of two Notices of Appeal was not clearly stated. In addition, the issues were not succinctly and clearly presented. Indeed, at the opening of the hearing, I sought agreement on the issues. I prepared a summary of what I perceived to be the issues and furnished counsel with same. It was not until the end of the ninth day of the hearing that an agreement on the issues was reached.
[13] A brief statement of what was in issue from each Notice of Appeal, a brief description of the reassessments and a brief description of the issues all could have been made by a co-operative act of counsel before the hearing, thus saving hours and hours of unnecessary search for comprehension of unfurnished detail. Further, the transcript of evidence consisting of nine thick volumes totalled 2,053 pages. The Appellant entered five thick volumes of documents and three volumes of “read-ins” of the manager of GAAR and Technical Support Section of the Canada Revenue Agency. The Appellant entered eleven volumes of documents as exhibits. The Appellant’s written submission was a tome of 217 pages. Admittedly, there were a great number of references to the transcript respecting certain facts and statements. The Appellant’s oral submission took the better part of one and one-half days. The Respondent’s written submission consisted of 52 pages with 163 paragraphs.
[14] This case is complex. I understand counsel wanting to be certain that all facts which may be relevant be placed before the Court. However, better selection and precision in preparation would have made the presentation of evidence and submissions much shorter.
FACTS
[15] The details of the reassessments have already been presented. I now set forth a summary of the facts upon which my conclusions are based. Those facts, together with related facts, all in great detail, are set forth in Appendix B attached to and forming part of these Reasons for Judgment. They include the Agreed Statement of Facts filed by counsel and a presentation of the evidence of three of the Appellant’s witnesses.
[16] The Appellant primarily carried on the business of industrial and agricultural chemical processing and distribution. Pruitt described Univar as a component that represented “maybe 15 to 20 percent of the entire UC conglomerate. This being a seasonal business, it regularly financed payments to suppliers of agricultural chemicals during the summer months and received payment after harvest.
[17] The UC Group policy was not to pay dividends. Only one dividend was paid by the Appellant to UC, that being the amount of approximately $6,000,000 in 1980.
[18] In the early 1990s the Appellant and the UC Group were facing a number of related and distinct problems.
Excess Cash
[19] The Appellant had excess cash from increasingly profitable operations and a strong balance sheet. It tried, to the fullest extent possible, to maximize monetary returns through various acquisitions or investments. It used some of its excess cash to fund acquisitions and the expansion of business operations. It expected the generation of excess cash to escalate, thereby resulting in serious treasury management issues. There were no further acquisition opportunities available after those made in the 1991 to 1993 period. The Appellant undertook to identify long-term investment opportunities that would produce a higher rate of return than the interest rate on Canadian Bankers’ Acceptance Notes.
Leverage
[20] Pruitt, the Chief Executive Officer of UC at the time of the transactions herein, believed that a company’s debt to equity ratio should be one to one in that if the business was under-leveraged (i.e., too little debt) it was not fully utilizing its capital. The Appellant’s debt to equity ratio was significantly below the ideal ratio. Pruitt described it as “woefully” under-leveraged. Pruitt testified that one way of improving the ratio was for the company to borrow against its available capital to make investments that had a rate of return in excess of the interest rate on the fund borrowed.
Guarantee Fee Issue
[21] In the 1989 through 1992 fiscal years UC and its wholly owned
US
subsidiary, the operating company, were borrowers under the 1989 Credit Agreement in respect of which the Appellant was the sole guarantor. As a result of the Appellant’s guarantee the Minister reassessed the Appellant for its 1989 to 1992 taxation years to include in its income an amount for providing a guarantee of the obligations of UC. That issue was resolved, but not until September, 1996. In the 1992 to 1995 fiscal years UC and some members of the Group, including the Appellant, were borrowers under another credit arrangement, the Appellant being an authorized borrower and jointly and severally liable for the obligations of each. Pruitt and Lundberg testified that although this should have eliminated the Appellant’s exposure to income inclusion, both the Appellant and UC continue to be concerned that the Minister would pursue this issue.
[22] As a result of the Appellant’s status as a guarantor of the 1989 Credit Agreement and joint and several liability of the 1992 Credit Agreement, the law firm, Baker McKenzie, advised UC that it had a problem under Internal Revenue Code provision 956. The advice was that it would deem UC to have received, as a dividend, on most, if not all, of the Appellant’s earnings and related deemed taxes.
Debt Within the Group
[23] In June 1991 UE borrowed funds from its shareholders and loaned the proceeds of those loans to the
UK
and Swedish operating companies. Some loans were interest bearing and others non-interest bearing. As a result, UC was holding a disproportionate amount of the Group’s debt and was looking for strategies where it could equalize the debt to equity ratios throughout the Group as a whole.
Other Issues
[24] The aforesaid guarantee arrangements created American tax issues for UC involving the application of US foreign tax credit rules and limitations on their use. Those limitations created “excess foreign tax credits” subject to a two year carry-back and five year carry-forward life. They could be used only to the extent of “qualifying foreign source income”, the ability to earn same being dependent on “overall foreign loss”. The “overall foreign loss” was a significant deterrent to the use of foreign tax credits by UC. Lundberg was preoccupied with resolving UC’s excess foreign tax credit issues.
[25] In addition, there were too many tiers of Group in
Europe which created US tax problems, the result of which was that the operating companies had to be consolidated.
[26] In the early 1990s the Appellant and UC explored alternative investment strategies to address the foregoing problems. In early 1993, based on professional advice, Pruitt proposed and the Group decided to implement the following sequence of events as an integrated solution to the problems which, over a two-year period,
evolved into the following:
(a) The number of tiers within the Group in
Europe would be reduced.
(b) A greater amount of the European loans would be restructured into interest bearing obligations so the operating companies would bear their proportionate amount of the Group’s debt and the notes receivable would become an attractive investment.
(c) The Appellant and UE would enter into a Multi-Currency Line of Credit.
(d) The Appellant would establish and capitalize an international financing subsidiary in a jurisdiction which had a corporate tax rate of less than 90 percent of the prevailing
US
corporate federal tax rate and would have no existed retained earnings or profits (“NEWCO”).
(e) NEWCO would purchase the notes receivable from UC, earn interest income thereon and pay dividends to the Appellant.
(f) The Appellant would use a combination of excess cash and borrowed funds to capitalize NEWCO and thereby improve its debt to equity ratio while still generating a good return on its investment, and
(g) These solutions would also address a number of American tax issues.
[27] The Appellant performed due diligence to ensure that the integrated solution was in its best interests. Canadian tax issues were reviewed as part of its due diligence. The Appellant determined that the investment in Barbadosco would be economically viable and generate a reasonable return. Tole characterized the integrated solution as an “elegant solution”.
[28]
Barbados
was suggested, and ultimately chosen, over a number of other countries, as the jurisdiction in which to incorporate NEWCO because of the low corporate tax rate and all the necessary corporate, legal and banking requirements already extant due to the presence of many international financing corporations.
[29] The integrated solution was implemented. UE would then pay interest to Barbadosco which, after tax and administrative costs, would pay the remainder, as a dividend, to the Appellant. The interest to
Barbados
would be active business income and the Appellant would, accordingly, be entitled to deduct the appropriate amount pursuant to paragraph 113(1)(a).
[30] I reiterate that the evidence of Pruitt, Lundberg and Tole was clear that no consideration was ever given to the Appellant acquiring the notes receivable itself because that would not have resolved any problem.
ANALYSIS
Applicable Statutory Provisions
[31] In issuing the six reassessments (other than the subsection 162(1) penalty reassessment) the Minister relied upon subsection 95(6)(b). It reads as follows:
95(6) Where rights or shares issued, acquired or disposed of to avoid tax – For the purposes of this subdivision (other than section 90),
(b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition of the shares is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, those shares shall be deemed not to have been acquired or disposed of, as the case may be, and where the shares were unissued by the corporation immediately prior to the acquisition, those shares shall be deemed not to have been issued.
The Minister’s alternative argument respected the application of section 245, reading as follows:
245.(1) [Definitions] In this section,
"tax benefit" means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act;
“transaction" includes an arrangement or event.
(2) [General anti-avoidance provision] Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
(3) [Avoidance transaction] An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
(4) [Where s. (2) does not apply] For greater certainty, subsection 245(2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.
(5) [Determination of tax consequences] Without restricting the generality of subsection 245(2),
(a) any deduction in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, any income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be recharacterized, and
(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.
I now set forth in table form, the comparative steps for analysis of the two aforesaid sections in relation to the facts of this case:
Subsection 95(6)
Section 245
(a) acquisition of shares of Barbadosco.
(a) a “transaction” which includes an arrangement or event.
(b) did the acquisition permit a person to avoid, reduce or defer payment of that “that would otherwise be payable”?
(b) did the transaction result in a “tax benefit” which “means a reduction, avoidance or deferral of tax…”
(c) can it reasonably be considered that the principal purpose for the acquisition is to so avoid, reduce or defer tax otherwise payable?
(c) would the transaction be an “avoidance transaction” and can it reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to so reduce, avoid or defer a tax benefit?
(d) if there is an “avoidance transaction” can it reasonably be considered that it would result in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act, other than section 245, read as a whole?
Respecting the penalty reassessment, subsection 162(1) reads:
Every person who fails to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of
(a percentage formula follows)
Respecting the Minister’s ability to reassess the penalty subparagraph 152(4)(b)(iii) reads:
The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if …
(b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and…
(iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length.
Tax Benefit
[32] Essentially, the tax “that would otherwise be payable” referred to in paragraph 95(6)(b) is equivalent to the “tax benefit” under section 245.
[33] This is not a situation in which tax payable by Univar is reduced, avoided or deferred by any transaction that is part of a series of transactions.
[34] In McNichol v. HMQ 97 D.T.C. 111 this Court said at page 119:
There is nothing mysterious about the subsection 245(1) concept of tax benefit. Clearly a reduction or avoidance of tax does require the identification in any given set of circumstances of a norm or standard against which reduction is to be measured.
(Emphasis added.)
[35] In that case the termination of a corporation’s affairs was desired. The relevant parties sought a distribution of its funds in a manner other than by way of dividend. That manner resulted in an arrangement producing capital gains taxed, because of capital gains exemptions, in an amount appreciably less than otherwise
would have occurred. The above continued as follows:
Difficulties may exist in other cases in identifying the standard but in this case there is no such difficulty. The benefit sought by the appellants is clearly identified in the
March 16, 1989 letter of Mr. Dunnett. It is the difference between tax payable by the appellants upon receipt of taxable dividends and that payable upon realization of capital gains from the disposition of shares. It is beside the point that such benefit may also be described as the absence of a detriment. It cannot be said that the standard against which reduction is to be measured is nil on the basis that, absent a sale of shares, no tax would have been payable. For the appellants doing nothing was never in the realm of the possible, for their goal, present throughout, was the realization of the economic value of their shares…Their choice was between distribution of that accumulated surplus by way of liquidating dividend and sale of the shares and in choosing the latter they chose a transaction that resulted in a tax benefit within the subsection 245(1) definition.
[36] In Canada Trustco, 2005
SCC 54 the Supreme Court of
Canada
said:
Whether a tax benefit exists is a factual determination, initially by the Minister and on review by the courts, usually the Tax Court.
The Court said further that in some instances:
…it may be that the existence of a tax benefit can only be established by comparison with an alternative arrangement.
[37] Throughout the appeal, the Respondent’s cross-examination of Pruitt, Lundberg and Tole and the Respondent’s submissions clung to the hypothetical situation of the Appellant having acquired the debt owing by UE to UC as “an alternative arrangement”. Each of Pruitt, Lundberg and Tole were, without doubt, credible. The evidence of Pruitt, Lundberg and Tole, including all comments with respect to all documents presented to them by counsel for both parties form the factual basis which I have considered in my analysis. The evidence of all three such witnesses was clear that there was never any intent for Univar to acquire that debt and, in fact, Univar did not acquire that debt. It was acquired by Barbadosco with the monies used by Univar to subscribe for shares of Barbadosco.
[38] An example of the foregoing appears in the Respondent’s written submission
which reads as follows:
The Respondent submits that in some cases a reasonable measure of the taxes otherwise payable under the Act might be ascertained by determining the amount of tax that would have been paid by the shareholder on the income from the asset if it held the asset that the corporation acquired with the funds invested in the shares. It need not be contemplated that the shareholder would ever have contemplated acquiring that asset directly particularly if the sole reason that it would not be feasible to do so is the tax that would be payable under the Act on the income from the assets. …
The focus of paragraph 95(6)(b) is the receipt of money by shareholders from their corporations. Such money can be received by dividends, loan or interest (if the shareholder is a creditor of the corporation). In the present case, the basic or core intent of the transactions in issue was that the interest payable on the Univar Europe notes be received by the Appellant tax-free. The only way this could be accomplished under the Act was to pay this interest income to VWRB and the Appellant becoming a shareholder of VWRB, so that that money could be paid to the Appellant by way of dividends, otherwise that interest could come to the Appellant only if the Appellant became Univar Europe’s creditor. The tax that could otherwise have been payable under the Act would, had the shares not been acquired by the Appellant, have been the tax on that interest.
I underline what I have said above, namely that the Respondent’s case, both with respect to paragraph 95(6)(b) and section 245 is built solely upon the hypothetical premise that the debt of UE to UC was purchased by Univar, not by Barbadosco.
[39] The Federal Court of Appeal in Canadian Pacific Ltd. v. R. 2002 D.T.C. 6742 said at page 6750, paragraph 33:
A recharacterization of a transaction is expressly permitted under section 245, but only after it has been established that there has been an avoidance transaction and that there would otherwise be a misuse or abuse. A transaction cannot be portrayed as something which it is not, nor can it be recharacterized in order to make it an avoidance transaction.
[40] In Canada Trustco reference is made in paragraph 15 to the Explanatory Notes to Legislation Relating to Income Tax issued by the Honourable Michael H. Wilson, the Minister of Finance (June 1988) are an aid to interpretation. That paragraph says that the explanatory notes state at the outset that they
are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.
[41] At paragraph 30 the Court continues as follows:
It is useful to consider what will not suffice to establish an avoidance transaction under s. 245(3). The Explanatory Notes, at p. 464
Subsection 245(3) does not permit the “recharacterization” of a transaction for the purposes of determining whether or not it is an avoidance transaction. In other words, it does not permit a transaction to be considered to be an avoidance transaction because some alternative transaction that might have achieved an equivalent result would have resulted in higher taxes.
[42] The Respondent clearly cannot recharacterize what, in fact, happened in assuming that the Appellant purchased the aforesaid notes. That is simply not in accordance with the evidence of three credible witnesses for the Appellant. The attempted recharacterization is not an appropriate alternative arrangement to establish tax otherwise payable.
[43] The only alternate arrangement that can be considered is the possibility of the alleged avoidance transaction not having occurred. Had the shares of Barbadosco not been acquired by the Appellant, there would be no tax otherwise payable which could be avoided, reduced or deferred. The acquisition of such shares by the Appellant does not change that.
[44] With respect to section 245 there was, as described in (a) above a “transaction” which includes an arrangement or event. However, that transaction did not, as set out above, result in a tax benefit in that there was no reduction, avoidance or deferral of tax payable under the Act.
Avoidance Transaction
I turn now to a consideration of the questions raised under (c) in the above chart, reproduced here.
Subsection 95(6)
Section 245
(c) can it reasonably be considered that the principal purpose for the acquisition is to so avoid, reduce or defer tax otherwise payable?
(c) would the transaction be an “avoidance transaction” and can it reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to so reduce, avoid or defer a tax benefit?
[45] Paragraph 95(6)(b) requires the principal purpose of the share acquisition to be the avoidance, reduction or deferral of tax otherwise payable. As I have already decided that there was no tax otherwise payable to avoid, reduce or defer, subsection 96(5) cannot apply.
[46] If it were necessary for me to decide, under subsection 95(6), whether it could reasonably be considered that the principal purpose for the acquisition of shares of Barbadosco by the Appellant was to permit the Appellant
…to avoid, reduce or defer the payment of tax…that would otherwise be payable.
I would have found on a factual basis that it could not be so considered.
[47] Likewise, with respect to Section 245 there was, as described, a “transaction” which includes an arrangement or event. However, that transaction did not result in a tax benefit in that there was no reduction, avoidance or deferral of tax payable under the Act. Therefore, the transaction cannot be an avoidance transaction because it would not result, directly or indirectly, in a tax benefit.
[48] If it were necessary for me to decide, under section 245, whether a transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit, I would have found on a factual basis that it could reasonably be considered to have been so undertaken or arranged.
[49] I now turn to the reassessment of the Appellant for tax payable under Part XIII respecting the
August 6, 2001 reassessment for the 1995 taxation year. The Respondent’s argument with respect to the imposition of such tax rests in its view that the Appellant’s incorporation of Barbadosco and its use of Barbadosco to purchase the aforesaid notes formerly held by UC resulted in a misuse of subsection 15(2.2). Having made my conclusions above respecting section 245, the misuse argument is not open to the Respondent. Accordingly, the appeal respecting Part XIII tax will be allowed. No such tax will be payable under Part XIII.
[50] In respect of the
September 3, 2002 reassessment of a subsection 162(1) late filing penalty, the reassessment was made after the expiry of the time limit for doing so, it not having been made, within the meaning of subparagraph 152(4)(b)(iii):
...as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length.
It was made as a consequence of failing to file a tax return within the period prescribed for so doing. It is noted that this is an alternative argument. In respect of the taxation ending
July 15, 1996 for which this penalty was assessed, no amount as reassessed will be includable in the Appellant’s income and therefore no penalty will be payable.
RESPONDENT’S SUBMISSIONS
[51] I now turn to submissions made by Respondent’s counsel.
[52] Respondent’s counsel, in cross examination and in both the written and oral submission, dwelt upon the potential of how the debt purchase transaction could have been structured rather than of accepting the evidence as to how, in fact, it was structured. I have discussed the matter of recharacterization above, it not being available for the purpose of establishing an avoidance transaction but to be used only after determining the existence of an avoidance transaction under section 245. The same is true of paragraph 95(6)(b).
[53] Respondent’s counsel, in discussing the Principal or Primary Purpose of Setting Up Barbados in a written submission said:
The Respondent submits at the outset that the only purposes that are relevant under both paragraphs 95(6)(b) and section 245 of the Act are purposes that are relevant to the Appellant. In particular, the only purpose that is relevant under both paragraph 95(6)(b) and section 245, is the purpose of the share purchase transactions, i.e., whether they could reasonably be considered to have been entered into primarily for the purpose of avoiding, reducing or deferring the tax that would otherwise have been payable under the Act. Thus, even if it could be found that the principal or primary purpose of the transactions was to avoid, reduce or defer U.S. tax, this would be irrelevant.2 In the Respondent’s submissions, the same principle applies to any of the other alleged, non-tax, reasons, for the creation and operation of VWRB that are ex-traneous (sic) to the Appellant as a tax paying Canadian entity. They are also irrelevant to the issues under paragraph 95(c)(b) and section 245.2
RRM Canadian Enterprises Inc. and Equilease Corporation 97 D.T.C. 302, at 312 (T.C.C.), per Bowman, T.C.C.J.
[54] Presumably, the Respondent’s reasoning is derived from the statement by Bowman, J. that:
Section 245 operates within the context of Canadian tax law and it is within that context that the primary purpose is to be determined.
The Appellant’s position appears to be that where an avoidance transaction in
Canada results in greater inroads being made against the
U.S.
fisc than against the Canadian fisc the primary purpose cannot be the avoidance of Canadian tax. I do not accept t