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

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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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