Citation: 2013 TCC 231
BURLINGTON RESOURCES FINANCE COMPANY,
HER MAJESTY THE QUEEN,
REASONS FOR ORDER
In 2001 and 2002,
Burlington Resources Finance Company (the “appellant” or “BRFC”), a Nova Scotia
unlimited liability company (“NSULC”), borrowed approximately US $3 billion by
issuing seven bonds (the “Notes”) guaranteed by Burlington Resources Inc.
(“BRI”), its parent corporation. BRI was incorporated and resident in the United States. The appellant then loaned the funds to affiliated entities in Canada. During its 2002 to 2005 taxation years, the appellant paid approximately $83
million in guarantee fees to BRI (the “Guarantee Fees”).
The Minister of
National Revenue (the “Minister”) reassessed the appellant, disallowing
deductions for the Guarantee Fees and certain financing expenses incurred by
the appellant in issuing the Notes (the “Financing Costs”).
On April 30, 2013, each
party brought a motion. The respondent seeks permission to file an amended
reply (the “Amended Reply”). The appellant asks this Court to strike the
Amended Reply or, in the alternative, to order the respondent to provide
For the reasons that
follow, the respondent’s motion for permission to file the Amended Reply is
allowed. The appellant’s motion to strike the Amended Reply is also allowed.
However, the respondent is granted leave to file, within 60 days of this order,
a further amended reply within 60 days of this order, addressing the
deficiencies discussed below. The appellant may serve and file an answer within
60 days of the respondent’s serving and filing a further amended reply. Costs
shall be in the cause.
II Factual Background
The appellant is an
NSULC resident in Canada. BRI, its US parent, owns 100% of its shares, along
with the shares of several other corporations in Canada (the “Sister
During 2001 and 2002,
the appellant issued the Notes to arm’s length parties, raising approximately
US $3 billion. As a result, the appellant incurred two types of costs. During
its 2001 taxation year, the appellant incurred the Financing Costs, which
included underwriter’s fees, legal and accounting fees, and fees payable to the
Securities and Exchange Commission. During its 2002 to 2005 taxation years, the
appellant incurred the Guarantee Fees. According to the appellant, it incurred
the Guarantee Fees in exchange for BRI’s full and unconditional guarantee of
the principal and any premium and interest on each of the Notes.
The appellant, BRI and
the Sister Corporations also issued inter-company promissory notes and entered
into forward purchase agreements and swap agreements (the “Hybrid Instruments”)
whereby the appellant loaned the proceeds of the Notes to the Sister
Corporations. According to the respondent, the Hybrid Instruments ensured that
the appellant would be able to make payments due under the Notes. The Sister
Corporations used the proceeds for general corporation purposes, including
repaying existing debts and facilitating acquisitions of oil and gas assets.
In calculating its
taxable income for its 2002 to 2005 taxation years, the appellant deducted the
Guarantee Fees and the Financing Costs as follows: pursuant to section 9 of the
Income Tax Act (the “ITA”), the appellant deducted the annual
Guarantee Fees payable to BRI in each of those taxation years, the total annual
deductions claimed for Guarantee Fees being $23,156,153 for 2002, $21,952,025 for
2003, $19,590,771 for 2004, and $18,118,688 for 2005; and pursuant to paragraph
20(1)(e) of the ITA, the appellant deducted 20% of the total
Financing Costs for each of those taxation years.
In 2011, the Minister
reassessed the appellant, denying those deductions and levying transfer pricing
penalties against the appellant.
In denying the
deductions for the Guarantee Fees, the Minister relied on paragraphs 247(2)(a)
and (c) of the ITA, claiming that the terms or conditions of the
arrangement between the appellant and BRI in respect of the Guarantee Fees were
not terms or conditions that would have existed between arm’s length parties.
The respondent also invokes paragraphs 247(b) and (d) of the ITA
in her reply, arguing that the series of transactions giving rise to the
Guarantee Fees would not have been entered into between arm’s length persons
and can reasonably be considered not to have been entered into primarily for bona
fide purposes other than to obtain a tax benefit.
In denying the
deductions for the Financing Costs, the Minister relied on section 67 and
paragraph 18(1)(a) of the ITA, maintaining that the expenses
deducted were not reasonable and were not incurred for the purpose of earning
income from the appellant’s business.
The appellant filed a
notice of appeal (the “Notice of Appeal”) objecting to the reassessments. In
response, the respondent filed a reply (the “Reply”).
On April 10, 2013, the
appellant filed an amended notice of motion indicating that it would bring a
motion asking this Court to strike the Reply and allow its appeal on the basis
that none of the arguments pleaded by the respondent had a reasonable prospect
of success or, in the alternative, asking this Court to strike the Reply with
leave to file an amended reply within 15 days of the order or, in the further
alternative, asking this Court to order the respondent to deliver further and
better particulars in response to the appellant’s demand for particulars served
on the respondent on November 14, 2012.
On April 19, 2013, the
respondent served the appellant with the Amended Reply. The Amended Reply differs
from the original Reply in two material respects. First, the respondent no
longer contests the deductions for the Financing Costs. Second, the respondent
added assumptions regarding the facts concerning the series of transactions at
issue and the transfer pricing penalties assessed.
The appellant offered
to accept the filing of the Amended Reply, subject to two conditions: (i) that the
appellant’s forthcoming motion to strike the Reply be directed instead against
the Amended Reply; and (ii) that the respondent pay costs in the amount of
$5000. The respondent rejected this offer.
On April 30, 2013, each
party brought a motion. The respondent seeks to file its Amended Reply while the
appellant asks this Court to strike the Amended Reply and allow its appeal. In
the alternative, the appellant asks this Court to strike the Amended Reply with
leave to file a further amended reply. In the further alternative, the
appellant seeks further and better particulars in response to a demand for
particulars previously served on the respondent. I will consider each motion in
III Respondent’s Motion to File the Amended
The appellant argues
that the Amended Reply contains the same defects as the Reply. However, the
appellant accepts that the respondent’s motion to file the Amended Reply should
be allowed for the limited purpose of allowing the appellant’s motion to be
directed against the Amended Reply. The appellant seeks costs in the amount of
$5000 for accepting the Amended Reply. In light of the appellant’s position, I
allow the respondent’s motion to file the Amended Reply such that the
appellant’s motion to strike will be directed against the Amended Reply.
IV Appellant’s Motion to Strike the Amended Reply
As stated above, the
appellant asks this Court to strike the Amended Reply and allow the appeal with
costs. In the alternative, the appellant asks this Court to strike the Amended
Reply with leave to file a further Amended Reply. In the further alternative,
the appellant asks this Court to order the respondent to provide further and
better particulars in response to the appellant’s demand for particulars. The
appellant also seeks an extension of time to file an answer to the Amended
Reply, if necessary. The following is a summary of the parties’ submissions.
A. Appellant’s Submissions on the Motion to
At paragraphs 4 to 11
of its written submissions, the appellant summarizes its arguments as follows:
the appeal of the assessments to this Court, the Crown’s proposed Amended Reply
(the “Amended Reply”) begins by challenging BRFC’s contention that the question
under section 247 is the arm’s length price of the guarantee, and says that the
question is the arm’s length price of the guarantee fee. In other words, the
Amended Reply describes the question under section 247 as being the price of
the consideration paid by BRFC for the guarantee, and not the price of the
guarantee itself. The whole of the Amended Reply – including the alleged
assumptions of fact, other material facts, the issues to be decided and the
grounds relied on – are designed to show that the price of the “charges” was
not arm’s length.
says the Crown’s “price of the charges” theory is so nonsensical, illogical and
utterly unfounded in the relevant statutory provisions that it has no
reasonable prospect of success. The Amended Reply should therefore be struck
and BRFC’s appeal allowed.
“price of the charges” theory becomes even more confusing and untenable because
the Crown says it has “no knowledge” of the guarantee, or whether the fee in
issue was paid as consideration for that guarantee. Instead, the Crown alleges
that the guarantee fees were simply “charges” paid by BRFC to BRI. Therefore,
the Crown says the legal question to be decided is the arm’s length price of
certain “charges” – which are apparently unrelated to any guarantee – and urges
upon the Court the conclusion that those charges should be disallowed under
section 247. Again, there is no reasonable prospect of a properly-instructed
trial judge upholding the assessments on this theory and the Amended Reply
should therefore be struck.
if the Court permitted the Crown to amend its pleading to replace the “price of
the charges” theory with the obviously correct question of the “price of the
guarantee,” the facts assumed by the Minister and adopted by the Crown are
fatal to the Crown’s case. In the Amended Reply, the Crown admits that BRFC
would be unable to borrow money without the guarantee; that BRFC would not be
able to obtain an investment-worthy credit rating without the guarantee; that
an arm’s length lender would require an unconditional guarantee; and that the
fee an arm’s length party would require to guarantee BRFC’s debt would have
been “exorbitant.” These admissions conclusively demonstrate that the guarantee
had several bona fide business purposes, and that the annual fee was
less than an arm’s length party would charge. These admissions demolish the
assessments and are dispositive of a properly-framed case.
this Court conclude that the Crown’s “price of the charges” theory is tenable –
in the sense that it has a reasonable prospect of success despite the facts
assumed by the Minister and adopted by the Crown – BRFC nonetheless says that
the Amended Reply should be struck (but with leave to amend). The Amended Reply
is so utterly vague, confusing and riddled with internal contradictions and
inconsistencies and not compliant with the Rules that the matter cannot proceed
to the next stage until the Crown clearly and precisely lays out its case.
Otherwise, the litigation will be unfair, unfocused, disorganized, lengthy and
sought to obtain clarification of the Crown’s case, and potentially avoid this
motion, by serving a demand for particulars. If there was any doubt that the
vagueness and obfuscation in the Amended Reply is attributable more to design
than accident, the Crown’s response to the particulars confirms it. The Crown’s
response demonstrates that it has no intention or interest in clearly laying
out its case. The very purpose of pleadings is to force parties to clearly
articulate their cases so that the pre-trial process is fair and efficient.
BRFC says the Crown’s Amended Reply does not come close to meeting the minimally
acceptable standard for a proper reply and the Crown’s adamant refusal to
provide any particulars about material facts in the Amended Reply justifies
is yet another further and serious reason to strike the Crown’s Amended Reply.
The record demonstrates beyond any doubt that the Minister clearly and
unequivocally concluded that BRI had provided an unconditional guarantee and
that the 50 basis points paid by BRFC was consideration for that guarantee and
that the issue is the arm’s length price of the guarantee. These assumptions of
fact directly contradict the Crown’s “price of the charges theory” and its
central proposition that the amounts in issue are simply “charges” unrelated to
any guarantee. The Crown has chosen not to plead those findings and assumptions
in the Amended Reply. The power to plead assumptions provides the Crown with an
enormous advantage in tax litigation and along with this power comes the
obligation to plead assumptions completely and accurately. It is for this
reason that the Court has been uncompromising in its insistence that the Crown
has a high ethical obligation to fully and accurately plead all assumptions of
fact including those that favour the taxpayer. BRFC says the failure to plead
these assumptions is a ground to strike the Reply with leave to file an amended
pleading that fully and accurately pleads the basis of the assessment and the
this Court decline to strike the Amended Reply for any of the above described
reasons, BRFC requests in the further alternative that the Crown be directed to
provide requested particulars of imprecise or confusing allegations, and that
the Court grant BRFC an extension of time to file any Answer.
B Respondent’s Position on Motion
At paragraphs 34 to 36
and 38 to 41 of her written submissions, the respondent argues as follows:
arm’s length party, before agreeing to pay a guarantee fee, standing in the
shoes of the appellant, would consider circumstances such as its ability to
repay the debt; its risk of default; its ability to prevent default; the
control it has over servicing the debt, and other benefits/burdens.
parent structured the appellant without sufficient assets for or the ability to
bear the risks of operating as a finance company; made all the significant
decisions regarding the notes, including repayment; and could dictate
capitalization, the terms of the debt offerings, and the repayment of the debt
(i.e. could cause the appellant to default). The unlimited liability status of
the appellant made the parent ultimately liable for the unsatisfied debts. The
hybrid instruments directly affected the rights and obligations as between the
appellant and the parent with respect to the outstanding debt.
is far from plain and obvious that an arm’s length party, standing in the shoes
of the appellant, would agree to pay the parent any fee under such
. . .
question remains, at least for the purposes of subsection 247(2), what the
appropriate transfer price of the guarantee ought to be.
. . .
assessment is the determination, of the amount of a person’s tax liability. The
Minister makes assumptions of fact in determining that tax liability. These
assumptions may be made over the course of the assessment process. They are to
be pleaded accurately so that the taxpayer knows exactly the case and the
burden that has to be met on an appeal of the assessment.
purpose of pleadings and the applicable principles were set out in Zelinski
by Bowie J:
purpose of pleadings is to define the issues in dispute between the parties for
the purposes of production, discovery and trial. What is required of a party
pleading is to set forth a concise statement of the material facts upon which
she relies. Material facts are those facts which, if established at the trial,
will tend to show that the party pleading is entitled to the relief sought. . .
The respondent has
satisfied the requirements of pleading and supplemented the facts in the reply
with the particulars. The appellant has been fully apprised of the assumptions
made and other material facts which should allow it to identify the issues,
produce the relevant documents, and prepare itself for discovery and trial.
In CIBC v. Canada, the
Federal Court of Appeal heard an appeal against an order by the Tax Court
striking certain pleadings in the Crown’s reply. In the assessment, the
Minister had disallowed deductions claimed by CIBC in respect of payments made
by CIBC to settle lawsuits in which it was a defendant. Paragraph 134 of the
reply, which formed the basis of the Crown’s argument, stated:
misconduct of [CIBC and its affiliates] was so egregious and repulsive that any
consequential settlement payments […] cannot be justified as being incurred for
the purpose of gaining or producing income from a business or property within
the meaning of paragraph 18(1)(a) of the [Income Tax] Act. The [CIBC
affiliates] knowingly aided and abetted Enron to violate the United States’ federal securities laws and falsify its financial statements. The misconduct
of [the CIBC affiliates] in enabling Enron to perpetrate its frauds, known to
[CIBC], or the misconduct of [CIBC] itself, was so extreme, and the
consequences so dire, that it could not be part of the business of a bank.
At trial, CIBC had argued
that paragraph 134 and certain other pleadings regarding the propriety of
CIBC’s alleged conduct were irrelevant, prejudicial and had no reasonable
prospect of success, and thus should be struck.
At trial, Rossiter ACJ
concluded that many statements in the reply regarding CIBC’s alleged conduct
were scandalous, prejudicial or an abuse of process, and accordingly should be
struck. However, Rossiter ACJ refused to strike paragraph 134 of the reply,
concluding that it was not plain and obvious that the Crown’s theory as enunciated
therein could not succeed. CIBC appealed the decision upholding paragraph 134.
The Crown appealed the order striking the other statements.
The Federal Court of
Appeal began by describing the test for striking pleadings. At paragraph 7 of
the decision, Sharlow JA wrote:
is no dispute as to the general test for striking pleadings. It was recently
restated in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42,  3 S.C.R. 45
at paragraph 17. In the context of a motion to strike the Crown’s reply in an
income tax appeal, the motion will be granted only if it is plain and obvious,
assuming the facts as pleaded in the reply are true, that the reply fails to
state a reasonable basis for concluding that the reassessment under appeal is
The Federal Court of
Appeal disagreed with Rossiter ACJ’s order upholding paragraph 134 of the reply
and concluded that the propriety of a taxpayer’s conduct is irrelevant to the
deduction. At paragraph 76 of the decision, Sharlow JA wrote:
. . .
the only question to be asked in determining whether paragraph 18(1)(a)
prohibits a particular deduction is this: Did the taxpayer incur the expense
for the purpose of earning income? Since that is the only relevant question, it
follows that even if CIBC conducted itself as alleged . . . and even
if that conduct was egregious or repulsive, that characterization of the
morality of CIBC’s conduct is not legally relevant to the application of
paragraph 18(1)(a). Therefore, I agree with CIBC that paragraph 134 of
the reply should be struck.
The Federal Court of
Appeal went on to uphold Rossiter ACJ’s order to strike certain language that
was scandalous, prejudicial and abusive. At paragraphs 87, 89 and 90 of the
decision, Sharlow JA wrote:
. . having reviewed the reply, I agree with the judge that those words and
phrases were used, not only to state the facts that the Minister assumed or
that the Crown wished to allege, but to colour the facts in a way that would
invite the judge hearing the appeal to evaluate the propriety of the conduct of
the employees of CIBC and its affiliates. . .
the reasons stated at length in the context of the CIBC appeal in this case, an
evaluation of the morality of CIBC’s conduct is not relevant in determining the
deductibility of the settlement payments. The same is true of an evaluation of
the legality of that conduct under United States law. To include allegations of
that kind in the pleadings in this case, whether as part of the assumptions or
in the remainder of the reply, is bound to multiply the resources expended in
pre-trial discovery with no hope of producing anything that would be helpful in
determining the issues on appeal. At the very least, such allegations are likely
to delay the fair hearing of CIBC’s tax appeals, and I also agree with the
judge that they are also prejudicial and vexatious.
. . .
Such allegations invite debate that is pointless because it is not relevant.
CIBC should not be required to waste resources to refute assumptions or
allegations of fraud or criminal conduct that will do nothing to assist the Tax
Court in determining the deductibility of the settlement payments. For the
purposes of the present motion, the appellant must demonstrate that it is plain
and obvious that the pleadings at issue, if assumed to be true, fail to state a
reasonable basis for concluding that the reassessment is correct, or invite
debate that is legally irrelevant to the issues herein.
(1) Price of the charges theory
In its submissions, the
appellant clearly identified numerous drafting deficiencies in the Amended
Reply. Because of these deficiencies, the respondent has failed to adequately frame
its case with regard to how paragraphs 247(2)(a) and (c) serve as
a proper basis for the reassessments.
In paragraph 11(b) of her
Amended Reply, the respondent says that the issue to be decided in this appeal
with respect to paragraphs 247(2)(a) and (c) is “whether the
terms or conditions made or imposed in respect of the Charges” which the
respondent defines at paragraph 4 of the Amended Reply as the Guarantee Fees payable
by the appellant to BRI “differed from those that would have been made between
persons dealing at arm’s length.”
That formulation is
manifestly incorrect. The correct question under paragraphs 247(2)(a)
and (c) is whether the terms or conditions imposed in respect of the
guarantee itself, not the terms or conditions of the guarantee fees, differed
from those that would have been set between persons dealing at arm’s length. I
do not see how the respondent can rely on paragraphs 247(2)(a) and (c)
to challenge the terms or conditions regarding the amounts paid by the
appellant for the guarantee. Rather, if I understand the respondent’s position,
the terms or conditions she challenges under paragraphs 247(2)(a) and (c)
are the amounts of the fees themselves.
In my opinion, phrases
such as “the consideration for the guarantee fee” or “the price of the
guarantee fee” are unclear. If the respondent relies on paragraphs 247(2)(a)
and (c) to challenge the amounts of the fees paid by the appellant, the
issue is the price of the guarantee, not the price of or consideration for the
guarantee fees. Further, without acknowledging the existence of a guarantee,
how can one challenge the price of that guarantee? The respondent should
At the hearing, I asked
the respondent’s counsel why the respondent chose to ignore the existence of
the guarantee in the Amended Reply. Counsel suggested that it was done in order
to avoid compromising the respondent’s theory that an arm’s length person would
have refused to enter into the guarantee arrangement.
I see no harm in
acknowledging that the appellant contracted for a guarantee from BRI. Doing so
does not conflict with the respondent’s argument under paragraphs 247(2)(a)
and (c) or 247(2)(b) and (d) that an arm’s length person
would not have entered into the same agreement if placed in the circumstances
of the parties. Nor does acknowledging the existence of the guarantee conflict
with the respondent’s contention that the appellant can reasonably be
considered not to have entered into the transactions at issue primarily for
bona fide purposes other than to obtain a tax benefit.
The appellant also
takes issue with paragraph 7 of the Amended Reply, which states: “With respect
to paragraph 17 of the Notice of Appeal, [the respondent] denies the facts
alleged to the extent that they are inconsistent with the Minister’s
assumptions of fact as set out herein.” Paragraph 17 of the Notice of Appeal refers
to certain assumptions made by the Minister regarding the credit ratings of the
appellant and BRI, and regarding the necessity of BRI’s guarantee of the Notes.
In my opinion, the
respondent’s response in paragraph 7 of the Amended Reply is improper because
it does not clearly admit, deny or claim no knowledge of the facts in paragraph
17 of the Notice of Appeal. By denying certain facts “to the extent that they
are inconsistent with the Minister’s assumptions” in the Amended Reply, the
respondent invites unnecessary debate as to which facts in the Amended Reply
are “inconsistent” with the facts in paragraph 17 of the Notice of Appeal. Two
parties opposed in interest could disagree as to whether certain assumptions
are inconsistent. The respondent must take a clear position on these facts.
The appellant has
clearly pointed out numerous drafting deficiencies in the Amended Reply.
However, poor drafting is not a sufficient cause for striking the Amended Reply
and allowing the appeal. The appropriate remedy is to allow the appellant to
file a further amended reply acknowledging the existence of the guarantee and
properly framing the analysis under paragraphs 247(2)(a) and (c)
and 247(2)(b) and (d). The appellant should not be forced to
waste resources attempting to discern the respondent’s position on several of
the key facts at issue.
Although this disposes
of the appellant’s motion to strike the Amended Reply, I will consider the
appellant’s other arguments in order to provide the respondent with some
guidance for drafting its further amended reply.
(2) The respondent’s pleading of the
facts is inconsistent with a properly articulated case
The appellant argues
that the respondent cannot defend the reassessments because of certain assumptions
made by the Minister. It is the appellant’s submission that the following
assumptions set out in paragraphs 9 p), r), s), t) and x) of the Amended Reply
are fatal to the respondent’s case:
p) the Appellant was unable to borrow the funds it needed to
operate as a finance company on a stand-alone basis;
r) the Appellant was unable to carry out its financing
activities without an unconditional guarantee from its Parent;
s) the Appellant could not obtain an investment worthy
credit-rating without the guarantee provided by its Parent;
t) the Appellant’s functional deficiency and inability to
bear risk on a stand-alone basis made it imperative for any arm’s length lender
to require an unconditional guarantee from the Parent;
x) the fee an arm’s length party would require to guarantee
the Appellant’s debts would have been so exorbitant that the Appellant would
not have been able to on loan the funds at a competitive rate.
I disagree with the
appellant. These assumptions are not plainly and obviously fatal to the
respondent’s case under section 247, which is the test described in CIBC.
If I were to strike the
Amended Reply on the basis that these assumptions show that the price paid by
the appellant for the guarantee was not excessive, as alleged by the appellant,
then I would be required to compare the price paid by the appellant with the
arm’s length transfer price. Only a trial judge with access to all of the
evidence germane to this issue can properly undertake such an analysis.
In the Amended Reply,
the respondent points out that the appellant was an NSULC. Under section 135 of
the Companies Act,
present and certain past shareholders are liable for an NSULC’s unpaid debts
and liabilities if the NSULC is wound up and liquidated without sufficient
assets. This means that BRI would be liable for the appellant’s debts if the
appellant were wound up without sufficient assets. I agree with the respondent
that it is legitimate to ask whether an arm’s length person standing in the
appellant’s shoes would have been willing to pay the guarantee fees for BRI’s
explicit guarantee knowing that BRI was potentially responsible for the
appellant’s liabilities even without the guarantee.
The respondent also
invokes the recharacterization power under paragraphs 247(2)(b) and (d),
which permits a recharacterization of the guarantee if the following two
conditions precedent are satisfied: (i) an arm’s length person would not have
entered into the transactions at issue; and (ii) it is reasonable to consider
that the transaction was not entered into primarily for bona fide purposes
other than to obtain a tax benefit.
With respect to the
first condition precedent of paragraph 247(2)(b), the Amended Reply
states that the Minister assumed that an arm’s length person would not have
entered into the transactions at issue because, inter alia, the appellant
was significantly undercapitalized having regard to the amount of the Notes. I
cannot discern anything in the other assumptions of fact that contradicts this
The respondent also
pleads that the second condition precedent of paragraph 247(2)(b) is
satisfied. In the Amended Reply, the respondent contends that the guarantee and
the Hybrid Instruments used to “on loan” the proceeds to the Sister
Corporations were entered into “for no bona fide purposes other than to obtain
a tax deduction for the Appellant”.
I agree with the
appellant’s observation that several of the Minister’s assumptions might suggest
there were bona fide purposes to the transactions. However, I disagree with the
appellant that these assumptions are fatal to the respondent’s case. The
condition in subparagraph 247(2)(b)(ii) is satisfied only if the
taxpayer entered into the transaction “primarily” for bona fide purposes other
than to obtain a tax benefit. This contemplates that a taxpayer might enter
into a transaction for both tax and non-tax purposes.
The mere fact that
there may be some bona fide non-tax purpose for the transactions at issue does
not mean that the primary purpose of the transactions was a bona fide non-tax
purpose. The assumptions of fact referenced by the appellant are not plainly
and obviously inconsistent with the respondent’s position that the primary
purpose of the transactions was to obtain a tax benefit for the appellant.
(3) The duplication factor argument
The appellant also
takes issue with the respondent’s so-called “duplication factor” argument. At
paragraph 64 of the written submissions on its motion to strike, the appellant
the Crown relies on the so-called “duplication factor” to reduce the amount of
the guarantee fee to nil. The Crown essentially argues that the guarantee is
redundant because BRFC is an unlimited company formed under Nova Scotia law.
The Amended Reply, however, pleads that it was imperative for any arm’s length
lender to require an unconditional guarantee from BRI. The import of the
Crown’s pleadings is that the guarantee was necessary and sufficient for
lenders to invest in the Notes. The lenders or noteholders were entitled to rely
on the guarantee to make a claim against BRI if BRFC failed to make a payment
under the Notes. The Amended Reply says that the noteholders did not view the
guarantee as redundant, because the guarantee was imperative to them. In other
words, the noteholders would have been unwilling to lend BRFC US $3 billion in
the absence of a guarantee. Based on these pleadings, the “duplication factor” argument
In effect, it appears
that the appellant takes issue with the respondent’s argument that, although
BRI’s explicit guarantee was necessary, the arm’s length price of that
guarantee was nil because BRI implicitly guaranteed the Notes by virtue of the
appellant being an NSULC. However, I disagree with the appellant that it is
plain and obvious that this “duplication factor” argument cannot succeed.
In order for this element
of the pleading to be struck, I must conclude that an implicit guarantee is
necessarily less valuable than an explicit guarantee, which requires that I
consider the arm’s length price of an explicit guarantee. As I stated above,
this is the role of the trial judge, who must make determination in light of
all of the evidence.
(4) Incomplete pleading of assumptions
Finally, the appellant
argues that the respondent is required to admit in the Amended Reply that the Canada
Revenue Agency’s Transfer Pricing Review Committee (the “TPRC”) rejected a
request made by the respondent to assess the appellant under paragraphs 247(2)(b)
and (d). In the excerpt reproduced in paragraph 84 of the appellant’s written
submissions on its motion to strike, the TPRC responded as follows to the
request by the Calgary Tax Services Office (the “TSO”) :
TPRC . . . members have reviewed the facts and circumstances in
this case in support of the application of the re-characterization provisions
pursuant to paragraphs 247(2)(b) and (d). At this point in time,
the Chairperson has decided that the TSO should not proceed with
re-characterization given the circumstances of the file.
According to paragraph
87 of the appellant’s written submissions on its motion to strike, “the Crown
has an obligation to plead all of the facts and assumptions that led the
Minister to not recharacterize the transactions.” Therefore, the appellant
argues, the Amended Reply is improper because it did not disclose that the TPRC
rejected the TSO’s request for recharacterization under paragraphs 247(2)(b)
In support of its
argument, the appellant cites paragraph 29 of Canada v. Anchor Pointe Energy
where the Federal Court of Appeal states: “Fairness requires that the facts
pleaded as assumptions be complete, precise, accurate and honestly and
truthfully stated so that the taxpayer knows exactly the case and the burden
that he or she has to meet”. The appellant also cites paragraph 13 of Shaughnessy
v. The Queen,
where Associate Chief Judge Bowman CJ stated: “The pleading of assumptions
involves a serious obligation on the part of the Crown to set out honestly and
fully the actual assumptions upon which the Minister acted in making the
assessment, whether they support the assessment or not.”
According to paragraph
47 of the respondent’s written submissions, “[t]he facts that were described in
the referral differ significantly from the facts the Crown has set out as other
material facts and assume [sic] the onus of proving as true at trial”.
I disagree with the
appellant that the respondent is required to plead that the TPRC rejected the
TSO’s recharacterization request. First, such disclosure does not change or clarify
the case that the appellant has to meet or the burden that it must discharge,
as discussed in Anchor Pointe.
Second, it is not clear that the respondent “acted upon” the TPRC’s response in
assessing the appellant, as discussed in Shaughnessy.
The Amended Reply
suffers from numerous drafting deficiencies. However, the assumptions of fact
referenced by the appellant are not plainly and obviously inconsistent with the
transfer pricing adjustments at issue. Therefore, the appropriate remedy is to
strike the Amended Reply with leave to file a further amended reply that
acknowledges the existence of the guarantee and properly frames the question
for the trial judge’s consideration under paragraphs 247(2)(a) and (c)
and 247(2)(b) and (d), taking into account the deficiencies
The appellant has also
requested an extension of time to serve and file an answer. If the appellant
chooses to do so, it may serve and file an answer to the respondent’s further
amended reply within 60 days following the service and filing of the further
The respondent’s motion
to file the Amended Reply is allowed. The appellant’s motion to strike the
Amended Reply is also allowed. However, the respondent is granted leave to serve
and file within 60 days of this order a further amended reply addressing the
deficiencies discussed above. The appellant may serve and file an answer within
60 days of the respondent’s serving and filing the further amended reply. Costs
shall be in the cause.
Signed at Magog, Québec, this 17th day of July 2013.