Date: 20011213
Docket: A-541-00
Neutral citation: 2001 FCA 392
CORAM: STONE J.A.
BETWEEN:
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Docket: A-716-00
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Respondent
Heard at Toronto, Ontario, Wednesday, December 12, 2001.
REASONS FOR JUDGMENT BY: SEXTON J.A.
CONCURRED IN BY: STONE J.A.
EVANS J.A.
Date: 20011213
Docket: A-541-00
Neutral citation: 2001 FCA 392
CORAM: STONE J.A.
SEXTON J.A.
BETWEEN:
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Docket: A-716-00
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Respondent
REASONS FOR JUDGMENT
[1] This is an appeal from the Federal Court Trial Division which dismissed an appeal by the Appellant, General Electric Capital Equipment Finance Inc., from a reassessment by Revenue Canada of its 1986 year with respect to the Appellant's claim for an exemption from non-resident withholding tax pursuant to subpara. 212(1)(b)(vii) of the Income Tax Act.
[2] The facts are set out in detail in the Agreed Statement of Facts which was filed before the Trial Division and may be summarized as follows:
1. The plaintiff was incorporated in 1959 under thee laws of Canada with the name International Harvester Credit Corporation of Canada Limited ("IHCC")
2. IHCC was a wholly-owned subsidiary of Navistar International Corporation Canada, formerly, International Harvester Canada Limited ("IHC"), an Ontario corporation, which in turn was a wholly-owned subsidiary of Navistar International Corporation, formerly International Harvester Company ("IHCo), a Delaware corporation.
3. On December 18, 1986, IHC sold all of the issued and outstanding shares of IHCC to Genelcan Limited, a Canadian subsidiary of General Electric Company (the "IHCC sale"). The name of IHCC was changed in 1985 to Navistar Financial Corporation Canada Inc. and after the sale of Genelcan Limited was further changed to General Electric Capital Equipment Finance Inc., the plaintiff.
4. IHCC carried on the business of financing retail and wholesale sales in Canada of International Harvester products. In the course of raising capital for its financing purposes, IHCC issued the following subordinated promissory notes:
|
Original Issue Date |
Original Maturity Date |
Beneficial Owner of Note |
Principal Amount of Note |
|
March 15, 1977 |
March 16, 1982 |
Harbour* |
$ 5,000,000 |
|
March 15, 1979 |
March 16, 1984 |
Harbour |
$10,000,000 |
|
January 15, 1980 |
January 16, 1985 |
IHAC** |
$10,000,000 |
|
August 8, 1980 |
August 9, 1985 |
IHOF*** |
$15,000,000 |
* Harbour Assurance Company of Bermuda Limited (resident of Bermuda)
** International Harvester Acceptance Corporation Limited (resident of Bermuda)
***International Harvester Overseas Finance Corporation (resident of United States)
5. Each of the notes was issued in the name of Chemical Bank as holder on behalf of the respective beneficial owners of the Notes. On August 3, 1984, the IHOF note was transferred to International Harvester Export Company ("IHExport"), a corporation resident in the United States. Harbour, IHAC, IHOF and IHExport were all either directly or indirectly owned subsidiaries of IHCo.
6. Prior to its expiry, the maturity date was extended for one year as follows:
a) Harbour Note 1 extended to March 17, 1987, by confirmation issued by Chemical Bank on March 16, 1982;
b) Harbour Note 2 extended to March 15, 1986, by extension agreement executed by IHCC and Chemical Bank;
c) IHAC Note extended to March 15, 1986, by extension agreement executed by IHCC and Chemical Bank;
d) IHOF Note extended to March 15, 1986, by extension agreement executed by IHCC and Chemical Bank.
7. From the respective dates of issue of these notes until 1984, IHCC paid interest on the notes without payment of withholding tax.
8. In 1984, IHCC received Notices of Assessment with respect to the withholding tax which Revenue Canada maintained ought to have been withheld on account of interest payments made on the notes. As a result of these assessments, IHCC paid the applicable withholding tax set off against the principle amount of each of the notes as follows:
|
Designation of Note |
Amount of withholding Tax Set Of Against Principal |
Balance of Principal on Note |
|
Harbour Note 1 |
$ 924,141 |
$ 4,075,859 |
|
Harbour Note 2 |
$ 955,099 |
$ 9,044,901 |
|
IHAC Note |
$ 931,276 |
$ 9,068,724 |
|
IHOF Note |
$1,14,181 |
413,855,819 |
9. By separate agreements each dated February 18, 1985, the respective beneficial owner of each of the notes sold them to Harneth B.V., a Netherlands corporation which was an indirect wholly-owned subsidiary of IHCo.
10. In each case, interest on the applicable note was payable at such rate so as to result in the holder receiving, after application of any applicable withholding tax, a net return equal to the rate of interest set forth on the face of that note. This resulted in the following gross-up of interest rates:
|
Designation of Note |
Face Rate of Interest on Note |
Grossed-Up Rate of Interest |
|
Harbour Note 1 |
Bank of Montreal prime + ¾% |
117.647% of interest otherwise payable |
|
Harbour Note 2 |
10.375% per annum |
12.21% |
|
IHAC Note |
12.25% |
14.41% |
|
IHOF Note |
13.25% |
15.59% |
11. On December 18, 1986, the closing date of the sale of IHCC to Genelcan Limited, none of the notes were repaid. Genelcan delivered to IHC an undertaking to the effect that it would "pay or cause [IHCC] to pay in full all amounts owing on account of outstanding principal and accrued and unpaid interest in respect of the [notes] held by Harneth B.V., at the time, in the manner and at the places set forth, respectively, in such [notes]".
12. By Notice of Assessment dated July 7, 1989, the Minister of National Revenue assessed the plaintiff for the amount of $419,069 on the alleged grounds that the plaintiff failed to withhold and remit 15% non-resident tax under the provisions of the Income Tax Act.
13. On October 4, 1989, the plaintiff filed a Notice of Objection to the Assessment.
14. By letter dated March 13, 1990, the Minister of National Revenue notified the plaintiff that the Assessment was confirmed.
[3] In dismissing the taxpayer's appeal the Trial Division held that the original promissory notes were so materially altered by the agreements of February 18th, 1995 as to result in completely new obligations pursuant to subpara. 212(1)(b)(vii) of the Act.
[4] The Appellant argues that no new obligation was created by the agreements of 1985. It is the Appellant's position that the original obligation contained in the promissory notes is the same obligation pursuant to which payment was ultimately made on those notes. Changes to the promissory notes relating to the amount of principal, interest, and the date of maturity were mere amendments to the original obligation. The promise to pay only appears in the promissory notes and not in the 1985 agreements. Those agreements therefore, are not promissory notes themselves.
[5] The Appellant further argues that the only way an existing legal obligation can be superceded such as to acquire a new issue date is by means of a novation. The Appellant says that because the Trial Judge declined to consider the issue of novation, he had no legal basis upon which to base his judgment. In the present case, there was no novation because novation requires an extinguishment of the original debt and the substitution of a new debt although the Appellant conceded that it was not necessary to have a change of debtors in order for there to be a novation. The Appellant relies in this connection on National Trust v. Mead, [1990] 2 S.C.R. 410.
[6] The Appellant also complains that the Trial Judge neglected to take into account the expert evidence called by the Appellant to the effect that from the perspective of industry, a new obligation arises only if the existing obligation is extinguished and replaced by a new obligation. That expert took the position as well that the change in the date of maturity and other changes in the note relating to principal, interest and date of maturity were mere amendments to the original contract and did not result in an extinguishment of the original contract.
[7] Legislation
| 212.(1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, (b)interest except (vii) interest payable by a corporation resident in Canada to a person with whom that corporation is dealing at arm's length on any obligation where the evidence of indebtedness was issued by that corporation after June 23, 1975 if under the terms of the obligation or any agreement relating thereto the corporation may not under any circumstances be obliged to pay more than 25% of (B) . . . the principal amount of the obligation, within 5 years from the date of single debt issue or that obligation, as the case may be, |
212.(1) Toute personne non-résidente doit payer un impôt sur le revenu de 25% sur toute somme qu"une personne résidant au Canada lui paie ou porte à son crédit, ou est réputée en vertu de la partie I lui payer ou porter à son crédit, au titre ou en paiement intégral ou partiel : b) d'intérêts, sauf : (vii) les intérêts payables sur un titre par une société résidant au Canada à une personne avec laquelle cette société n'a aucun lien de dépendance, lorsque le titre de créance a été émis par cette société après le 23 juin 1975, si, selon les modalités du titre ou d'une convention s'y rapportant, la société ne peut, en aucun cas, être tenue de verser plus de 25%: (B) ... du montant du principal de l'obligation, dans les 5 années suivant la date de l'émission couvrant une dette unique ou de cette obligation, selon le cas, |
|
Analysis
[8] It was agreed by the parties that in order to determine whether the exemption provision applies to each note the following questions must be answered with respect to each note.
(a) Was the evidence of indebtedness issued after June 23rd, 1975? The answer is clearly yes for all of the notes.
(b) At the time the notes were paid in full on December 19th, 1986 did IHCC deal at arms length with Harneth? The parties have agreed that the parties did so deal.
(c) Under the terms of the obligation or the agreement relating thereto, is the payor obliged to pay more than 25% of the principal of the obligation within 5 years from the date of issue of that obligation. It is this last question which is at issue in the present case.
[9] The only issue then, in the present appeal is whether or not a new obligation was created by reason of the agreements in 1985 which decreased the amount of principal owing on the notes, increased the amount of interest payable under the notes, changed the date of maturity of the notes, and changed the identity of the payee. It should also be pointed out that Genelcan, in 1986, gave an undertaking that it would pay, or cause IACC to pay in full, all of the outstanding principal and interest on the notes held by Harneth, although there seemed to be agreement by the parties that this was irrelevant to the issue before us.
[10] The term "novation" is not included in the subpara. 212(1) and I therefore do not think that a novation as understood in the common law of contract is required before there can be a new obligation for the purpose of subpara. 212(1). "The Dictionary of Canadian Law" defines novation as being:
Novation. [A] trilateral agreement by which an existing contract is extinguished and a new contract brought into being in its place. Indeed, for an agreement to effect a valid novation the appropriate consideration is the discharge of the original debt in return for a promise to perform some obligation. The assent of the beneficiary (the creditor or mortgagee) of those obligations to the discharge and substitution is crucial. The Courts have established a three part test for determining if novation has occurred. It is set out in Polson v. Wulffsohn (1890), 2 B.C.R. 39 at 43 (S.C.)as follows:
...first, the new debtor must assume the complete liability; second, the creditor must accept the new debtor as a principal debtor, and not merely as an agent or guarantor; and third, the creditor must accept the new contract in full satisfaction and substitution for the old contract...''' National Trust Co. v. Mead (1990), 12 R.P.R. (2d) 165 at 180, [1990] 2 S.C.R. 410, [1990] 5 W.W.R. 459, 71 D.L.R. (4th) 488, 112 N.R.1, Wilson J. (Lamer C.J.C., La Forest, L'Heureux-Dubé, Gonthier and Cory JJ. concurring).
[11] However some guidance can be obtained from considering the case law relating to novation. In Prospect Mortgage v. Van-5 Developments Limited [1985] B.C.J. No. 2472 Mr. Justice Esson, speaking for the British Columbia Court of Appeal, said:
Because novation is essentially an issue of fact, it would be wrong in principle to say, as a generalization, that assumption agreements or extension agreements, or other particular classes of documents, do or do not create a novation. The question must be decided in each case having regard to all circumstances of which the language of the new contract is only one.
This statement was quoted with approval by Madam Justice Wilson National Trust v. Mead [1990] 2 S.C.R. 410 at page 432, who confirmed that novation is a question of fact.
[12] Although novation is not necessarily the same thing as a change of obligation as that term is used in subsection 212(1), I believe that because novation is an issue of fact, whether or not a new obligation has been created is also, by analogy, a question of fact.
[13] The question then is how to determine whether transactions have created a new obligation rather than simply modified an existing obligation. Some guidance can be obtained from the decision in Wiebe et. al. v. The Queen 87 D.T.C. 5068 (FCA) where this Court held that fundamental changes to a stock option agreement which substantially affected the basic elements of the agreement were inconsistent with the continuing existence of that agreement.
[14] The fundamental terms of the promissory notes in question were
(1) (a) the identity of the debtor;
(2) (b) the principal amount of the note;
(3) (c) the amount of interest under the note; and
(4) (d) the maturity date of the note.
[15] In the present case, all but one of these fundamental terms were changed. By way of example, in Note number four, the maturity date was changed from August 9, 1985 to March 15, 1987, the principal amount of the note was changed from $15, 000, 000.00 to $13, 855, 819.00, and the interest rate was changed from 13.25% to 15.95%. The other notes have comparable changes. These represent substantial changes to fundamental terms of the obligations and have the effect of materially altering the terms of the original promissory note.
[16] I am of the view that when it can be said that substantial changes have been made to the fundamental terms of an obligation which materially alter the terms of that obligation, then a new obligation is created within the meaning of subpara. 212(1)(b)(vii) of the Act. In my opinion, the Trial Judge did not commit an overriding or palpable error when, on the evidence before him he found, as a fact, that the changes were sufficiently fundamental as to bring into existence a new obligation.
[17] As to the omission by the Trial Judge to make reference to the expert testimony called by the Appellant, while, it might have perhaps have been helpful if the learned Trial Judge had commented upon this evidence, it appears to me that the evidence was not helpful. What is in issue in the present case is the meaning of the term "obligation" in the Income Tax Act. This is not something upon which an expert can be particularly helpful.
[18] For these reasons I would dismiss this appeal.
[19] Although the Respondent was successful at trial and requested costs in its pleading, the Judge did not address costs at all in his decision. The normal rule is that costs should follow the event and no reason has been given in this case for departing from this rule. Consequently, I would order that costs both at trial and on appeal shall go to the Respondent.
"J. E. Sexton"
J.A.
"I agree
A. J. Stone"
"I agree
John M. Evans"
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
DOCKET: A-541-00
STYLE OF CAUSE: GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
AND BETWEEN:
DOCKET: A-716-00
HER MAJESTY THE QUEEN
Appellant
- and -
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Respondent
DATE OF HEARING: WEDNESDAY, DECEMBER 12, 2001
PLACE OF HEARING: TORONTO, ONTARIO
REASONS FOR JUDGMENT BY: SEXTON J.A.
CONCURRED IN BY: STONE J.A.
EVANS J.A.
DATED: THURSDAY, DECEMBER 13, 2001
Page: 2
APPEARANCES BY: B. Franklin Shostack
For the Appellant, General Electric Capital
Equipment Finance Inc. (A-541-00)
Marie-Thérèse Boris
For the Respondent, Her Majesty the Queen
(A-541-00)
Marie-Thérèse Boris
For the Appellant, Her Majesty the Queen
(A-716-00)
B. Franklin Shostack
For the Respondent, General Electric Capital
Equipment Finance Inc. (A-716-00)
SOLICITORS OF RECORD: Black, Sutherland, Crabbe LLP
Barristers & Solicitors
401 Bay Street, Suite 2700
Toronto, Ontario
M5H 2Y4
For the Appellant, General Electric Capital
Equipment Finance Inc. (A-541-00)
Morris Rosenberg
Deputy Attorney General of Canada
For the Respondent, Her Majesty the Queen
(A-541-00)
Morris Rosenberg
Deputy Attorney General of Canada
For the Appellant, Her Majesty the Queen
(A-716-00)
Black, Sutherland, Crabbe LLP
Barristers & Solicitors
401 Bay Street, Suite 2700
Toronto, Ontario
M5H 2Y4
For the Respondent, General Electric Capital
Equipment Finance Inc. (A-716-00)
FEDERAL COURT OF APPEAL
Date: 20011213
Docket: A-541-00
BETWEEN:
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
BETWEEN:
Docket: A-716-00
HER MAJESTY THE QUEEN
Appellant
- and -
GENERAL ELECTRIC CAPITAL EQUIPMENT FINANCE INC.
Respondent
REASONS FOR JUDGMENT