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Devon: TCC considers large corporation rules

In Devon Canada Corporation v. The Queen the issue is whether the taxpayer (“Devon”) may deduct $20,884,041 paid to cancel issued stock options. After the close of pleadings, the Crown brought a procedural motion relating to the large corporations rules. The Tax Court allowed the motion in part, and struck certain portions of Devon’s Notices of Appeal (2014 TCC 255) (the main tax issue has not yet been heard by the Tax Court).

The content of objections and appeals for large corporations is subject to specific rules in the Income Tax Act (Canada). Under subsection 165(1.11), a large corporation’s Notice of Objection must describe each issue, the specific the relief sought for each issue, and facts and reasons in support of its position. Further, under subsection 169(2.1), the large corporation may appeal to the Tax Court only with respect to the issues and relief sought in the Notice of Objection. The Federal Court of Appeal recently considered these rules in Bakorp Management Ltd. v. The Queen (2014 FCA 104) (see our post on Bakorp here).

In the present case, the Tax Court highlighted some of the themes that have emerged from the case law on this issue:

  1. a taxpayer is not required to describe each issue exactly but is required to describe it reasonably (Potash Corporation of Saskatchewan Inc. v. The Queen, 2003 FCA 471);
  2. the determination of what degree of specificity is required for an issue to have been described reasonably is to be made on a case by case basis (Potash);
  3. a taxpayer may add new facts or reasons on appeal but not new issues (British Columbia Transit v. The Queen, 2006 TCC 437);
  4. if the proposed additional argument would result in the large corporation seeking greater relief than was previously sought, the courts are more likely to consider the argument to be a new issue rather than a reason (Potash; Telus Communications (Edmonton) Inc. v. The Queen, 2005 FCA 159);
  5. if the proposed additional argument would result in the large corporation seeking the same relief that was previously sought, the courts are more likely to consider the argument to be the same issue (British Columbia Transit; Canadian Imperial Bank of Commerce v. The Queen, 2013 TCC 170); and
  6. if the proposed additional argument would result in the large corporation seeking completely different relief than was previously sought, the courts are more likely to consider the argument to be a new issue rather than a reason (Bakorp Management Ltd. v. The Queen, 2014 FCA 104).

Devon raised three arguments in its Notices of Appeal for the deductibility of the payments to cancel stock options. These were summarized by the Tax Court as follows:

(a) Devon’s primary argument is that the payments are deductible as current expenses under subsection 9(1);

(b) In the alternative, Devon argues that the payments are eligible capital expenditures that, once added to cumulative eligible capital, would result in deductions pursuant to paragraph 20(1)(b). It further argues that, due to the fact that there were acquisitions of control of both of the predecessor companies during the taxation periods in which the payments were made, subsection 111(5.2) applies to cause significant additional deductions of cumulative eligible capital; and

(c) In the further alternative, Devon claims that the payments are financing expenses deductible under paragraph 20(1)(e).

The Crown argued that Devon, a large corporation in the years at issue, only referred to section 9 in its Notice of Objection. The other provisions – namely paragraph 20(1)(b) and subsection 111(5.2) and paragraph 20(1)(e) – were mentioned in a supplementary memorandum filed by Devon during the objection process. As such, references to provisions other than section 9 should be struck from Devon’s Notice of Appeal.

The Tax Court held that no mechanism in the Act would permit the supplemental memorandum filed by Devon to amend the original Notice of Objection. However, the Tax Court struck out references to paragraph 20(1)(b) and subsection 111(5.2) but not paragraph 20(1)(e).

The Tax Court held that paragraph 20(1)(e) did not raise a new issue and was merely an alternative reason argued by the taxpayer in favor of deducting the payments to cancel the issued stock options. However, paragraph 20(1)(b) and subsection 111(5.2) raised new issues that were not otherwise raised in the Notice of Objection and would have entitled Devon to a deduction for amounts in its cumulative eligible capital that were unrelated to the payments to cancel the stock options.

Although the taxpayer did not describe the relief sought with respect to paragraph 20(1)(e) in the Notice of Objection and only specified allowing the deduction in full, the Tax Court agreed that if a full deduction is pleaded under subsection 169(2.1) then a partial deduction of the same nature should not necessarily have to be separately pleaded under the large corporation rules.

Both the taxpayer and the Crown have appealed this procedural decision to the Federal Court of Appeal (Court File No. A-389-14).

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Devon: TCC considers large corporation rules

McKesson: Trial Judge Recuses Self From Two Remaining Issues in Transfer Pricing Case

In McKesson v. The Queen (2014 TCC 266), Justice Patrick Boyle recused himself from the two remaining issues with which he was seized in the transfer pricing case – costs and the content of the court’s public file (i.e., the determination of whether certain information may be confidential).

This unusual decision arises as a result of the content of the Appellant’s factum filed in the Federal Court of Appeal in the appeal of Justice Boyle’s trial decision in McKesson (see our posts on the Tax Court case here and the Federal Court of Appeal proceeding here and here).

In his recusal reasons, Justice Boyle wrote:

[4]        As detailed below, I have, of my own motion, decided that I am compelled to consider whether I need to recuse myself from the two remaining issues before this Court. A consideration of this issue is required because I became aware that the Appellant and Appellant’s counsel, together with its co-counsel in the Federal Court of Appeal in respect of the appeal of the trial decision, had made certain public written statements about me in its factum in the Federal Court of Appeal (the “Factum”) which, upon reflection, appear to me to clearly include:

(i)         allegations that I was untruthful and deceitful in my Reasons;

(ii)         clear untruths about me, what I said and heard in the course of the trial, as well as the existence of evidentiary foundations supporting what I wrote in my Reasons; and

(iii)        allegations of impartiality on my part.

[5]        This requires me to consider whether:

(i)         I believe that a reasonable person reading the Factum, my Reasons, and the relevant portions of the transcript would believe that the trial judge so strongly complained of by McKesson Canada might not be able to remain impartial in his consideration of costs and confidential information;

(ii)         I believe I can impartially consider, weigh and decide the costs and confidential information issues before me; and

(iii)        whether the public challenge of my impartiality expressed by McKesson Canada and its co-counsel in the Factum is itself sufficient to warrant recusing myself at this stage.

 …

[133]     I view these as public allegations by a party to the costs and confidential information matters remaining before this Court that, regardless of the merits of their reasoning or their thoughts, I am unable to decide the remaining matters impartially. I believe that a reasonable person reading only these phrases from the Factum, without reviewing my Reasons or the trial Transcript, would believe that such strong complaints by McKesson Canada and its counsel may give rise to a serious doubt that I will be seen to be able to dispose of the two remaining issues and discharge my duties on an impartial basis.

[136]     For the Reasons identified above, I have decided I have to recuse myself from the remaining costs and confidential information issues in McKesson Canada’s proceeding in this Court.

[137]     It may be that some of the perceived untruths about the trial judge described above under heading II might individually not warrant recusal, and may be within an appellate advocate’s licence to overstate through the use of absolutes like ‘never’, ‘only’ and ‘any’.

[138]     However, I am satisfied that a reasonable fair-minded Canadian, informed and aware of all the issues addressed above, would entertain doubt that I could remain able to reach impartial decisions. I believe that such a reasonable fair-minded and informed person, viewing this realistically and practically would, after appropriate reflection, be left with a reasoned suspicion or apprehension of bias, actual or perceived. Canadians should rightly expect their trial judges to have broad shoulders and thick skins when a losing party appeals their decision, but I do not believe Canadians think that should extend to accusations of dishonesty by the judge, nor to untruths about the judge. Trial judges should not have to defend their honour and integrity from such inappropriate attacks. English is a very rich language; the Appellant and its counsel could have forcefully advanced their chosen grounds for appeal without the use of unqualified extreme statements which attack the personal or professional integrity of the trial judge.

[139]     For these reasons, I will be advising my Chief Justice that I am recusing myself from completing the McKesson Canada proceeding in the Tax Court. This extends to the consideration and disposition of the costs submissions of the parties in this case, as well as to the 2010 confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry.

No date has been set for the hearing of the main matter by the Federal Court of Appeal.

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McKesson: Trial Judge Recuses Self From Two Remaining Issues in Transfer Pricing Case

McKesson: Respondent’s Factum Filed

Earlier this year, McKesson Canada Corporation appealed the decision of the Tax Court of Canada in McKesson Canada Corporation v. The Queen (2013 TCC 404) (see Federal Court of Appeal File Nos. A-48-14 and A-49-14).

At issue was the appropriate discount rate paid under a receivables sales agreement between McKesson Canada and its parent company, MIH, under section 247 of the Income Tax Act (Canada). A secondary issue was the assessment of withholding tax on a deemed dividend that arose as a result of the lower discount rate. For our earlier blog post on the Tax Court decision see here.

In the Federal Court of Appeal, the Appellant’s Memorandum of Fact and Law was filed on June 11, 2014. For our earlier post summarizing the appellant’s memorandum see here.

The Respondent’s Memorandum of Fact and Law was recently filed on August 11, 2014.

In its Memorandum, the Respondent states that the trial judge’s “carefully reasoned decision” and findings were “amply supported” by the evidence at trial and no palpable and overriding error can be found in the trial judge’s conclusions.

The Respondent summarizes its points at issue at paragraph 56 of its Memorandum:

  • The trial judge applied the correct test. His decision was based on what arm’s-length persons would agree to pay for the rights and benefits obtained and not on findings of tax avoidance, lack of need for funds, or group control.
  • Ample evidence supports the trial judge’s determination of the arm’s-length discount rate. Since no palpable and overriding error was committed, his decision should not be disturbed.
  • The trial judge did not commit an error of law in concluding that the five-year limitation period in Article 9(3) of the Canada-Luxembourg Tax Treaty does not apply to the Part XIII tax reassessment at issue.

No hearing date has yet been set for the hearing in the Federal Court of Appeal.

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McKesson: Respondent’s Factum Filed

Communications With Experts: Moore v. Getahun and the Advocates’ Society Report

An expert does not draft his/her report in a vacuum. Communication with counsel is required. Ultimately, an expert must provide independent and objective evidence at a hearing. So the question arises as to what amount of communication is appropriate between counsel and the expert during the drafting stage. This was an issue considered by the Ontario Superior Court of Justice in Moore v. Getahun (2014 ONSC 237).

In Moore, the plaintiff suffered a wrist injury in a motorcycle accident, and claimed medical negligence against the treating doctor. The defendants called an expert to testify on the medical treatment of the plaintiff following the accident. During the preparation of the expert’s report, the expert and defence counsel had a 90-minute conference call during which the draft report was discussed.

In 2010, sections 4.1 and 53.03 of the Ontario Rules of Civil Procedure were amended to (among other things) codify the expert’s duty to the court and to require the execution and filing of an expert’s certificate acknowledging this duty.

These amendments are similar to the recent amendments to the Tax Court of Canada Rules (General Procedure): Section 145 (“Expert Witnesses”), Form 145(2) (“Certificate Concerning Code of Conduct for Expert Witnesses”) and Schedule III (“Code of Conduct for Expert Witnesses”).

In Moore, the court considered the Ontario Rules of Civil Procedure amendments and concluded:

Whether it is appropriate for counsel to review experts’ draft reports

[519]      Defence counsel reviewed Dr. Taylor’s draft report during a one-and-a-half-hour telephone conference call.

[520]      The purpose of Rule 53.03 of the Rules of Civil Procedure is to ensure the independence and integrity of the expert witness. The expert’s primary duty is to the court. In light of this change in the role of the expert witness under the new rule, I conclude that counsel’s practice of reviewing draft reports should stop. There should be full disclosure in writing of any changes to an expert’s final report as a result of counsel’s corrections, suggestions, or clarifications, to ensure transparency in the process and to ensure that the expert witness is neutral.

(See also the court’s discussion of this issue at paragraphs 47-52 of the Moore decision.)

Not surprisingly, the Ontario court’s narrow interpretation of Rule 53.03 attracted the attention of litigators across the country.

In response, the Advocates’ Society has drafted a position paper (and a set of nine principles) regarding communications with expert witnesses. The Advocates’ Society has taken the position that the view expressed by the court in Moore (i.e., that the amendments constitute a change in the role of expert witnesses) is mistaken. The case law prior to Moore on the subject of experts’ testimony had established that experts must testify independently and objectively. Further, the amendments were likely responding to the specific problem of “hired guns” or “opinions for sale”, and thus codified the expert’s duty and imposed the certificate requirement so that testifying experts clearly understand their duty to the court.

The report also notes the problems and unintended consequences of the court’s ruling in Moore – namely, that the ruling fails to recognize the “important and entirely appropriate role” of advocates in ensuring that expert evidence is presented in a cogent, succinct and well-organized fashion that will assist the trier of fact; further, a “one-size-fits-all” approach to communications with experts is discordant with the realities of modern litigation.

Given the similar language in the Tax Court’s rules regarding expert evidence, Moore could have an impact on the manner in which expert reports are to be prepared for a Tax Court proceeding.

Moore has been appealed to the Ontario Court of Appeal.

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Communications With Experts: Moore v. Getahun and the Advocates’ Society Report

McKesson: Appellant’s Factum Filed‏

On January 10, 2014, McKesson Canada Corporation appealed the decision of the Tax Court of Canada in McKesson Canada Corporation v. The Queen (2013 TCC 404) (see Federal Court of Appeal File Nos. A-48-14 and A-49-14).

In McKesson, the Tax Court upheld the CRA’s transfer price adjustments (made pursuant to section 247 of the Income Tax Act (Canada)) that had reduced the discount rate paid under a receivables sales agreement between McKesson Canada and its parent company, MIH, from 2.206% to 1.013%. The Tax Court also upheld the assessment of withholding tax on a deemed dividend that arose in a secondary adjustment resulting from the lower discount rate.

The Appellant’s Memorandum of fact and law was filed on June 11, 2014.

In its Memorandum, the Appellant states that the Trial Judge made a “fundamental error of law” and requests that the appeal be allowed with costs and the matter be remitted to the Tax Court for a new trial before a different judge. The Appellant describes the issues on the appeal as follows:

Did the Trial Judge err in law by stepping outside the pleadings and the case put forward and as developed by the parties over the course of the trial to find against McKesson Canada, thereby depriving McKesson Canada of its right to know the case it had to meet and its right to a fair opportunity to meet that case?

Did the Trial Judge err in law when he misconstrued the arm’s-length principle by holding that, in determining what terms and conditions arm’s length parties would have made or imposed, he was to assume that one party (purchaser) controls the other (seller)?

As a result of stepping outside of the pleadings and the case put forward and as developed by the parties over the course of the trial and committing an error of law, did the Trial Judge calculate the discount rate in a manner that ignored the assumption of risk by MIH, contrary to the terms of the Agreement and resulted in a discount rate that is commercially absurd?

Did the Trial Judge err in permitting the Minister to assess non-resident withholding tax after the expiry of the applicable limitation period and in contravention of Canada’s obligations under a bilateral tax treaty?

See our previous commentary on the Tax Court’s McKesson decision here.

 

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McKesson: Appellant’s Factum Filed‏

There’s A Litigation App For That?

We were intrigued to learn that KosInteractive LLC has created the U.S. “Fed Courts” app for Android and Apple devices which contains helpful information about U.S. federal courts rules of procedure and court information. The app provides access to the PACER (Public Access to Court Electronic Records) database, and the procedural rules for appellate, bankruptcy, civil, and criminal proceedings. The federal rules of evidence and the U.S. Supreme Court procedural rules are also available. One drawback – the information isn’t searchable or indexed with hyperlinks.

In any event, there seems to be no Canadian equivalent for litigation or procedural apps.

A quick search in the Apple iTunes stores for “Canada tax” returns 54 results, including an array of federal and provincial tax calculators. ”Canada courts” returns five items, including apps related to the Controlled Drugs and Substances Act, mortgage foreclosures, U.S. Miranda warnings, and a car dealership. A search for “Ontario civil procedure” returns one item, and “Canada tax court” returns zero items.

We are reminded of the very helpful event app developed by the Canadian Tax Foundation that has become a regular feature of the Foundation’s national and regional conferences.

We are confident that Canadian tax professionals would welcome a broader array of court and litigation procedure apps that would provide mobile access to most or all of the court and procedural information we’re stuffing into our oversized litigation bags.

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There’s A Litigation App For That?

U.S. Supreme Court Justice Scalia on Advocacy and Judging

The U.S. Supreme Court’s Fall term began on October 7, and there has been no shortage of recent articles on the docket and Judges of the Court. In a previous post, David Spiro noted a remarkable piece on U.S. Supreme Court Chief Justice John Roberts’ advocacy practice before he was appointed to the Court, and in a recent issue of New York Magazine, Justice Antonin Scalia provided his candid views on advocacy and judging.

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U.S. Supreme Court Justice Scalia on Advocacy and Judging

What Kind of Appellate Lawyer was Justice Roberts?

I first heard of John Roberts Jr. when he was nominated to the United States Supreme Court as Chief Justice.  I watched the coverage on C-SPAN which replayed a seminar that he gave to a group of law students on advocacy.  I was quite impressed – but not as impressed as I was after reading this article from The American Lawyer magazine.  Appellate advocates have much to learn from the Chief Justice of the United States:

http://www.americanlawyer.com/PubArticleTAL.jsp?id=1202620317367

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What Kind of Appellate Lawyer was Justice Roberts?