Date: 20030116
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
GILLETTE CANADA INC.
Respondent
Heard at Montreal, Quebec, on January 13, 2003.
Judgment delivered at Montreal, Quebec, on January 16, 2003.
REASONS FOR JUDGMENT BY: THE COURT
Date: 20030116
CORAM: DÉCARY J.A.
NOËL J.A.
PELLETIER J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
GILLETTE CANADA INC.
Respondent
REASONS FOR JUDGMENT
[1] This is an appeal from a decision of Judge Rip of the Tax Court of Canada ([2001] 4 C.T.C. 2884; 2001 D.T.C. 895) vacating an assessment issued by the Minister of National Revenue under Part XIII of the Income Tax Act.
[2] The facts relevant to the appeal are outlined in a Statement of Agreed Facts which was filed before the Tax Court Judge and which reads as follows:
1. During the period under review, the Appellant was a corporation resident in Canada and its headquarters were located at 16700 Trans-Canada Highway, Kirkland, in the province of Quebec, H9H 4Y8;
2. The Appellant's 1989 taxation year ended on December 31, 1989;
3. At all relevant times, The Gillette Company, a U.S. Corporation with its headquarters in Boston, Massachusetts, was the sole shareholder of the Appellant;
4. At all relevant times, The Gillette Company was the principal member of the partnership Gillette France SNC, all other members being wholly-owned subsidiaries of The Gillette Company;
5. On December 1, 1989, The Gillette Company was still the principal member of the said partnership, owning an interest of at least 99%, the remainder being owned by a wholly-owned subsidiary of The Gillette Company;
6. On May 26, 1987, the Appellant's parent, The Gillette Company, transferred to the Appellant a 9.9% interest, said interest being of an estimated value of CDN $6,160,000.00, in its ownership in Gillette France SNC, a partnership under French law (the Partnership Interest), as a contribution of capital in the same amount;
7. As a result of the transfer, the Appellant's contributed surplus was increased by an equivalent amount (CDN $6,160,000.00), such amount being later adjusted to CDN $5,301,600.00 to equal the value of the note receivable from Gillette France SNC (see paragraph 10 below), without any corresponding payment being made or liabilities being assumed by the Appellant in respect thereof;
8. On June 30, 1987, the Appellant transferred the Partnership Interest to one of its subsidiaries, Oral B Laboratories SA (Oral B France), in exchange for 46,267 shares of Oral-B France of an estimated value of CDN $6,160,000.00 (the shares);
9. The net effect of the transactions described in paragraphs 6 to 8 was that the Appellant's value was increased by an amount of CDN $5,301,609.00;
10. On November 30, 1989, Gillette France SNC repurchased the Partnership Interest held by Oral B France in exchange for a note in the amount of FF 27,761,825 (the Note) payable by Gillette France SNC to Oral-B France;
11. On November 30, 1989, Oral B France repurchased 47,618 shares of Oral B France from the Appellant in exchange for the assignment of the Note;
12. On December 1, 1989, the Note was converted into an indebtedness (a "loan" according to Respondent), in the amount of CDN $5,301,600.00, based on an exchange rate of CDN $1.00 = 5.2365 FF, for a French franc value of FF 27,761,828 which bore no interest and was payable by Gillette France SNC to the Appellant at the latest on December 1, 1999, unless otherwise provided by both parties or unless renewed by the parties under the same conditions;
13. On September 20, 1994, at Appellant's request, Gillette France SNC repaid the indebtedness (a "loan" according to Respondent) in full to the Appellant in the amount of CDN $5,301,609.00;
14. Such indebtedness (a "loan" according to Respondent), was repaid more than one year after the end of the Appellant's 1989 taxation year;
15. In response to a proposed assessment by the Minister under Part XIII, the Appellant, on November 21, 1995, requested that the Minister offset the alleged liability resulting from the Minister's application of subsection 214(3) of the Income Tax Act, pursuant to subsection 227(6.1) of the same Act.
16. By Notices of assessment and re-assessment dated December 30, 1996:
(i) on the one hand (assessment no. 6046076), the Minister levied a Part XIII withholding tax in the amount of CDN $795,240.00, together with interest in the amount of CDN $598,645.01 in respect of the Appellant's 1989 taxation year, on the basis that the Appellant became liable for such tax and interest as a result of the indebtedness (a "loan" according to Respondent) referred to in paragraph 10;
(ii) on the other hand (re-assessment no. 6046078), the Minister credited a tax in the amount of CDN $795,240.00, but not the interest of CDN $598,645.01, in response to the Appellant's request dated November 21, 1995.
[3] The Tax Court Judge held that the conversion of the note described in paragraph 12 above constituted a loan by the respondent to the partnership, Gillette France SNC (Gillette France SNC or the partnership) (reasons, paragraph 25) as well as a "payment" or "credit" within the meaning of paragraph 212(13.1)(b) (reasons, paragraph 26), with the result that the partnership was with respect to that payment deemed to be a non-resident person under Part XIII (reasons, paragraph 31) and hence a "taxpayer" for purposes of paragraph 214(3)(a) (reasons, paragraph 32).
[4] However, he went on to hold that subsection 15(2), which must be applicable in order for paragraph 214(3)(a) to have effect, would not have required the partnership to include the amount of the loan in the computation of its income because the partnership was not "connected" with the respondent's shareholder (The Gillette Company) within the meaning contemplated by that provision. As a result, the amount in question was not deemed to have been paid as a dividend pursuant to paragraph 214(3)(a) and hence was not subject to tax under Part XIII.
[5] The Minister challenges the correctness of the aforementioned conclusion of the Tax Court Judge. According to the Minister, the Tax Court Judge erred in holding that the partnership was not "connected" with The Gillette Company within the meaning of subsection 15(2). If that is so, the amount of indebtedness was to be notionally included in the computation of the partnership's income with the result that a deemed dividend arose pursuant to paragraph 214(3)(a) and a non-resident tax was properly exigible.
[6] The respondent, while supporting the conclusion of the Tax Court Judge with respect to subsection 15(2), takes the position that he erred inter alia in reaching the prior conclusion that the conversion gave rise to a payment or credit within the meaning of paragraph 212(13.1)(b) and that it can be construed as giving rise to a loan for purposes of subsection 15(2). It is common ground that the Minister's appeal cannot succeed if neither a payment, a credit or a loan can be said to arise from the conversion.
[7] We have come to the conclusion that it was not open to the Tax Court Judge having regard to the facts before him to hold that the conversion gave rise to a payment or credit within the meaning of paragraph 212(13.1)(b) or to a loan for purposes of subsection 15(2). In our view, the Tax Court Judge after recognizing that the original note (to which reference is made in paragraphs 10 and 11 of the Statement of Agreed Facts) did not give rise to a credit, payment or loan within the meaning of the above-mentioned provisions failed to recognize that the second instrument had the same effect as the first and therefore had to be construed the same way.
[8] The Statement of Agreed Facts makes it clear that the original note was assigned to the respondent in exchange for the shares which it held in Oral B France. As was noted by the Tax Court Judge, no payment, credit or loan can be said to arise from this assignment as no debtor-creditor relationship existed and the assignment did not involve the discharge of any obligation by the partnership (reasons, paragraph 17); the partnership merely happened to be the maker of the note which was assigned in payment.
[9] We agree with the conclusion reached by the Tax Court Judge on this point and reject the suggestion made by counsel for the appellant in open court to the effect that subsection 15(2) applies to any debt whether or not a debtor-creditor relationship exists. Such a relationship must exist in one form or another before subsection 15(2) can be invoked, and the assignment of the original note did not involve or give rise to this relationship.
[10] As a result of what the parties referred to as the conversion in paragraph 12 of their Statement of Agreed Facts, one instrument was simply substituted for another. This is confirmed by the entries recording the transaction. Journal entry 12-622 (A.B. page 132) dated December 31, 1990, purports to record the redemption of Gillette Canada's Oral B shares. The explanatory note states:
Record the redemption of 47,618 shares of Oral-B France in exchange for a 27,761294 FF Non-interest Bearing Note Receivable from Gillette France. (FX 1$Cdn = 5.2365FF)
[11] A subsequent journal entry 12-649 of the same date reverses entry no. 12-622 with the following explanatory note:
Reverse JE 12-622. Gillette will not be discounting the Long Term Non-interest Bearing Note Receivable. As per consultations with KPMG and Peter Hart (Boston).
[12] A final entry also dated December 31, 1990, once again records the redemption of the Oral B shares:
Record the redemption of 47,618 shares of the Oral-B France in exchange for a Long Term Non-interest Bearing Note Receivable from Gillette France on Cdn$ 5,301,599.
[13] It can be seen from the foregoing that as between the appellant and the partnership nothing was changed by the substitution of the second instrument for the first except for the currency of payment. In particular, the creditor remained the same, the debtor remained the same, the amount remained the same (though as noted the currency changed) and the debt continued to be "Long Term Non-interest Bearing". Furthermore, these entries show the second instrument as the only consideration received by the respondent in exchange for the disposition of the Oral B shares.
[14] As the Tax Court Judge notes at paragraph 25 of his reasons, the fact that the documentation sometimes identified the second instrument as a loan does not make it so. In this instance, the only way in which the second instrument can be viewed as a payment, credit or loan is if one ignores the evidence which establishes that it was issued and accepted as replacement for the original note in circumstances where the terms remained the same except for the currency of payment. It follows that it was not open to the Tax Court Judge to hold that this instrument evidenced a loan for purposes of subsection 15(2).
[15] Having so concluded, there is no need to opine on the correctness of the Tax Court Judge's conclusion that the partnership was not "connected" to the respondent's shareholder within the meaning of subsection 15(2). Nor do we need to address the reasoning which led the Tax Court Judge to conclude that the partnership was a "person" for purposes of paragraph 212(13.1)(b) and hence a taxpayer under paragraph 214(3)(a).
[16] We wish to make one additional observation before leaving this matter. Where parties wish to reduce or eliminate the need to call evidence at the trial of their appeal, they are free to enter into an Statement of Agreed Facts, as was done here. However, the Statement should be limited to facts which could be proven from the mouths of their witnesses; the legal consequences which flow from those facts is a matter for argument and should not appear in the Statement of Agreed Facts. Where transactions are documented, the circumstances of the making of the documents is an appropriate subject for an Statement of Agreed Facts, but the legal effect of the documents is not. The documents should be before the Court so that it can assess whatever the parties may wish to say about their effect. When the parties put their view of the documents, rather than the documents themselves, before the Court, any recharacterization of one or more elements of the transaction puts all concerned in the position of having to draw legal conclusions based upon their interpretation of the Statement of Agreed Facts, rather than the original documents. The Statement of Agreed Facts in this instance may have made things more complicated rather than less.
[17] The appeal should be dismissed with costs.
"Robert Décary"
J.A.
"Marc Noël"
J.A.
"J. D. Denis Pelletier"
J.A.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-715-01
STYLE OF CAUSE:
HER MAJESTY THE QUEEN
Appellant
and
GILLETTE CANADA INC.
Respondent
PLACE OF HEARING: Montreal, Quebec
DATE OF HEARING: January 13, 2003
REASONS FOR JUDGMENT OF THE COURT : DÉCARY J.A.
NOËL J.A.
PELLETIER J.A.
DATED: January 16, 2003
APPEARANCES:
Mr. Pierre Cossette FOR THE APPELLANT
Mr. Pierre Barsalou/
Mr. Zoltan Ambrus FOR THE RESPONDENT
SOLICITORS OF RECORD:
Morris Rosenberg
Deputy Attorney General of Canada
Montreal, Quebec FOR THE APPELLANT
Barsalou Lawson
Montreal, Quebec FOR THE RESPONDENT
FEDERAL COURT OF CANADA
APPEAL DIVISION
Date: 20030116
Docket: A-715-01
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
GILLETTE CANADA INC.
Respondent
REASONS FOR JUDGMENT OF THE COURT