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Taxpayer entitled to disclosure of the “policy” underlying statutory provisions allegedly abused in GAAR cases

On December 20, 2012, the Tax Court ruled on a motion under Rule 52 of the Tax Court of Canada Rules (General Procedure) (the “Rules”) to require the Minister to comply with a demand for particulars specifying how the Income Tax Act (the “Act”) was abused in a General Anti-Avoidance rule (“GAAR”) case.

In Birchcliff Energy Ltd. v The Queen (2012-10887(IT)G), the Minister alleged that the GAAR should apply because the series of transactions (the “Transactions”) undertaken by the taxpayer resulted in a misuse of 10 sections of the Act and an abuse of the Act as a whole. In response, the taxpayer sought an order requiring the Minister to disclose the policy behind each section of the Act that was allegedly abused and how the Transactions abused that policy.

The Tax Court held that the Minister must disclose the object, spirit, and purpose of the provisions of the Act (the “Policy”) that the assessor relied upon in making the assessment. The Minister does not need to disclose the actual Policy that will be argued at trial, or the way that the Policy was abused.


The taxpayer argued that in making a GAAR assessment, the Minister must assume as a fact the Policy and an abuse of that Policy. Relying on Johnston v M.N.R. (1948 S.C.R. 486), the taxpayer argued that the Crown had a duty to disclose “precise findings of fact and rulings of law which have given rise to the controversy”. The taxpayer also argued that there was a heightened obligation on the Minister to be specific in cases of misconduct, negligence, or misrepresentation, relying on Chief Justice Bowman’s decision in Ver v Canada ([1995] T.C.J. No. 593). Misuse or abuse, it was argued, belonged in the category of offenses requiring more precise disclosure.

The Minister, on the other hand, argued that the Policy was a conclusion of law, not fact and that only allegations of fact must be disclosed in particulars. The Minister raised a “slippery slope” argument, suggesting that this ruling could require the Crown to explain its legal interpretation of all provisions of the Act in the future. Although the Minister acknowledged that Trustco v Canada (2005 SCC 54) placed the burden of identifying the Policy on the Crown, that burden did not apply to pleadings. The Minister also argued that disclosing the Policy would not help the Appellant because the Minister could still argue a different policy at trial.


The Tax Court highlighted the unique nature of GAAR, and stated that any disclosure requirements from this case would only apply to GAAR assessments. Justice Campbell Miller specifically pointed to the Crown’s burden to prove the Policy in GAAR cases as evidence of its unique requirements.

Justice Miller separated the elements of the Policy into two distinct categories:

1)      The actual Policy that would be argued and decided at trial (the “True Policy”), and

2)      The fact that the Crown relied on a particular Policy when determining that GAAR should be applied (the “Historical Policy”).

The Court held that the True Policy was a question of law that should ultimately be decided by the court. This policy was open to change throughout the course of litigation and did not need to be disclosed to the Appellant at this stage.

The Historical Policy, however, was held to be “a material fact, not an assumption, but the fact the Minister relied upon x or y policy underlying the legislative provisions at play in the case.” Taxpayers are entitled in pleadings to know the basis of the assessment. Disclosing the Historical Policy would be similar to disclosing the legislation upon which non-GAAR assessments are made. The Court distinguished the Historical Policy from the type of materials to which the taxpayer was denied access in Mastronardi v The Queen (2010 TCC 57), a recent Tax Court decision holding that the Minister did not need to disclose the extrinsic materials on which the Minister relied in determining the Policy. In Mastronardi, the materials sought to be disclosed were evidence that could be used to prove the policy, rather than the material fact of which policy was relied on (evidence itself is not a material fact).

The Historical Policy that must be disclosed is not the Policy of each identified section in isolation. The Minister must identify the collective policy of all of the identified provisions together that the Crown relied on in making the assessment. The Historical Policy should be disclosed under paragraph 49(1)(e) of the Rules as “any other material fact”.

With regards to the Appellant’s request for information on how the Policy was abused, the Court held that it was not required to be disclosed. Abuse is a conclusion of law to be determined by the court based on the Policy and the facts of the case. The Minister did not assume how the Policy was abused as a fact. The Minister concluded, based on the Policy and the facts assumed, that there was an abuse.

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The Tax Court has reiterated that the taxpayer is entitled to know the basis of the assessment made against him.  Such an approach is consistent with principles of fundamental fairness and is entirely in keeping with the letter and spirit of the Rules.

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Taxpayer entitled to disclosure of the “policy” underlying statutory provisions allegedly abused in GAAR cases

Successful Challenge to Portions of the Crown’s Reply on the Deductibility of Amounts Paid by CIBC to Settle Enron Litigation

On December 19, 2011, the Tax Court partially granted an application by Canadian Imperial Bank of Commerce (“CIBC”) (2011 TCC 568). The motion concerned whether the Crown’s Reply should be struck out, either wholly or in part (there were actually four separate Replies, but all are substantially similar). Associate Chief Justice Rossiter did not strike out the entire Crown pleading, but ordered 98 paragraphs struck out and 92 paragraphs amended from the main Reply (with the same amendments to be made to the other three Replies). The main Reply was 94 pages long with 70 pages of assumptions.

The Tax Court appeals involve the deductibility of amounts paid by CIBC to settle litigation arising from the failure of Enron in 2001. CIBC was named (along with a number of other parties) as a defendant in a pair of law suits filed after Enron went bankrupt. CIBC settled the claims against it in consideration for a payment of $2.65 billion in 2005 and deducted those amounts, along with related interest and legal expenses in computing income for its 2005 and 2006 taxation years.

The Minister of National Revenue denied the deduction of the settlement amounts. CIBC appealed to the Tax Court of Canada. The Crown filed a Reply, and CIBC filed a motion to have the Reply struck out in its entirety. The contentious point is whether the “egregious or repulsive” principle can be used to determine whether expenses are deductible. The concept was referred to at paragraph 69 of the reasons for judgment in 65302 British Columbia Ltd. v. Canada where a majority of the Supreme Court of Canada (per Iacobucci J.) made the following observation:

It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income. However, such a situation would likely be rare and requires no further consideration in the context of this case, especially given that Parliament itself may choose to delineate such fines and penalties, as it has with fines imposed by the Income Tax Act.

On this motion, the Crown argued that it should be open to it to establish that the “egregious or repulsive” principle could also apply in respect of amounts paid in order to settle litigation. CIBC contended that this concept has never been held to apply to settlement amounts and that, as a result, the Reply was fatally deficient.

Associate Chief Justice Rossiter first concluded that part of a pleading should only be struck where it is “certain to fail because it contains a radical defect.” Here, the Crown was trying to use the “egregious or repulsive” principle to justify denying the deduction of amounts paid to settle a law suit rather than amounts laid out to pay fines. The Court acknowledged that the “egregious or repulsive” principle had been developed by the courts in the context of fines, but noted that it could apply to settlement payments, and so the Respondent’s pleadings did have a chance of success. He refused to strike the Crown’s entire pleading as a result.

However, Associate Chief Justice Rossiter found that in the Reply the Crown pleaded evidence, conclusions of law or mixed fact and law, immaterial facts or advanced prejudicial or scandalous claims or claims that were an abuse of process of the Court. In the result, the Court held that portions of the Reply were improper and had to be removed. The Crown was given 60 days to file a less argumentative Amended Reply with the offending portions deleted.

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Successful Challenge to Portions of the Crown’s Reply on the Deductibility of Amounts Paid by CIBC to Settle Enron Litigation

Tax Court of Canada confirms that pleadings will be struck out only in the “clearest of cases”

On December 19, 2011, the Tax Court dismissed a motion by General Electric Canada Company and GE Capital Canada Funding Company (the “Appellants”) in their current appeals (2010-3493(IT)G and 2010-3494(IT)G). The Appellants sought to strike several paragraphs from the Replies filed by the Crown on the basis that the Crown was relitigating a previously-decided matter. Justice Diane Campbell dismissed the motion but gave leave to the Crown to make a small amendment to one of the Replies.

General Electric Canada Company (“GECC”) is the successor by amalgamation to General Electric Capital Canada Inc. (“GECCI”), and GECC had inherited commercial debts owed by GECCI. GECC was reassessed and denied the deduction of fees paid to its parent corporation (“GECUS”) for guaranteeing the inherited debts. However, GECCI had previously litigated the deductibility of those fees and won (see General Electric Capital Canada Inc. v. The Queen, 2009 TCC 563, aff’d 2010 FCA 344). The current appeal involves similar issues, but with different taxpayers (GECC instead of GECCI) and tax years. In their application, the Appellants argued that the Crown was trying to relitigate issues that had been decided in the previous appeal.

The Court first dealt with the Appellant’s contention that res judicata precluded the Crown from having the issues reheard in another trial. Res judicata may take one of two forms: “cause of action” estoppel or “issue” estoppel. For either to apply, the parties in the current matter must have been privy to the previous concluded litigation. The Appellants said GECC had been privy to the decision since both it and GECCI were controlled by a common mind. The Court dismissed that argument since the appeals involve different tax years from those in the previous concluded litigation and, therefore, reflect different causes of action.

The Appellants also argued that it was an abuse of the Court’s process to relitigate the purpose and deductibility of the fees since the debt and the fee agreements were substantially the same as those in the previous concluded litigation. They asked the Court to strike out references to those agreements from the Replies. The Crown’s counter-argument was that the nature of the agreements was a live issue since it was not established that the fee agreements between GECUS and GECC were the same as those with GECCI. The Court agreed and refused to strike the sections of the Replies referring to the agreements.

The Appellants also sought to strike parts of the Replies where the Crown denied facts which the Appellants said had been proven in the previous concluded litigation. Again, the Court noted that the issues in the present appeals were different than those at issue in the previous concluded litigation, and that the Appellants did not show that the facts at issue (which were part of a joint statement of facts in the prior case) had actually been considered by the Court in the prior decision. Since the facts had not been proven they were best left to be determined later at trial.

Further, the Appellants contested two theories reflected in the Replies that they characterized as a fishing expedition. The Appellants stated these theories were not used as a basis for the original reassessment and, therefore, violated the restrictions on alternative arguments under subsection 152(9) of the Act. The Court dismissed this argument, saying that the theories were simply alternative approaches to showing that the guarantee fees paid by GECC were not deductible. The Court held they were alternative pleadings and refused to strike them out. Further, the Appellants also argued that two separate basis for the reassessments (one based on paragraphs 247(2)(a) and (c); the other, on paragraphs 247(2)(b) and (d)) should be pleaded as alternative grounds, since the two parts of that section were inconsistent with one another. This was dismissed on the basis that the two parts were complementary and were drafted in a way so that if both were satisfied, one would take precedence over the other.

Finally, the Appellants argued that they had been deprived of procedural fairness as the CRA had not consulted its own Transfer Pricing and Review Committee with respect to the reassessments, and the Appellants had been unable to make submissions to that committee. The Court held that there was no requirement that the committee consider the matter first and, even if there was, the Tax Court does not rule on administrative matters.

In the end, the Appellants succeeded on one minor point: the Crown will amend one paragraph in one Reply to clarify the distinction between legally binding guarantees and implied guarantees or support. The Crown was awarded costs.

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Tax Court of Canada confirms that pleadings will be struck out only in the “clearest of cases”