Oct 3, 2019
Tax authorities have become increasingly aggressive in auditing taxpayers and challenging tax planning arrangements, even structures that many would consider “plain vanilla.” The targets of these audits could be any taxpayer: large public corporations, SMEs, family businesses, family offices and individuals. The tax authorities are testing the limits of their audit powers by demanding interviews of management employees and making broad requests for information and documentation. Further, there has been a significant increase in audit activity by Revenue Québec, which is bringing more and more cases to court. This means that taxpayers operating in Québec face the reality of having to deal with two tax authorities, sometimes acting independently and sometimes adopting contradictory positions. This put taxpayers to the task of having to defend their structures.
This seminar focused on recent audit activity and initiatives at the federal and Québec levels, including cases involving arguments of sham and ineffective transactions, challenges to loss consolidation planning and the increasing application by the tax authorities of gross negligence penalties and assessment of statute-barred years.
Video transcript
LOUIS TASSE: Justice from the Supreme Court, So [SPEAKING FRENCH] I would also like to thank all of those who are attending through the webinar. We want to welcome you to this Osler Tax Seminar and Webinar. First of all, I do want to thank both Marshall and Al because they flew to Montreal to be with us today. And I truly appreciate that.
As part of the seminar, feel free to ask questions. It's always nice when we can make this interactive. And for those of us who are joining us through the webinar, for technical reasons and time management reason, it won't be possible to address your question on the spot. But if you do send questions by email, we will respond to them in the coming days.
Finally, we will make the presentation available to everyone who attended the seminar. And the certificates for members of the Quebec Bar will be emailed to you shortly after the event. With that, let me present you our presenters. I'm going to start with Marshall.
Marshall had a stellar career at the Federal Court Trial Division, Federal Court of Appeal, and finally at the Supreme Court of Canada level. He played a pivotal role in a number of major tax cases. And I would mention cases like Copthorne, Lipson, Glaxo, and OSFC, and there are many others. Thank you, Marshall.
Al, what can I say about Al? Al litigated a number of very important tax cases for the past, I guess I would say more than 20 years. And he argued landmark cases going back to Shell Canada, the interest deduction case, a bunch of GAAR cases, Trustco and others, a bunch of transfer pricing cases; Glaxo, GE Capital, recently the chemical decision. And he also doubles in GST. And he argued-- one very important cases that he argued is the CIBC World Market case. Al, thank you.
Finally, let me introduce you to Mark. Mark in addition to being a good friend is the leader of the Montreal Tax Group in Osler in Montreal. He's also the chair of the Canadian Tax Foundation. Mark is well known for his expertise in tax planning. But I know for a fact, and I even know more than I did a year ago before I joined Osler, Mark is heavily involved in tax controversy cases. And he gets involved at every step of the way. The only thing that he does not do is actually stand up in court and argue a case.
MARK BRENDER: We'll have to change that.
LOUIS TASSE: Yeah, I think-- actually we should, because I seen Mark argue cases in his office and--
MARK BRENDER: With myself.
LOUIS TASSE: And he's is pretty convincing. So with that, this is the overview of what we will be covering today. As you can see, we want to talk about the fact that the tax authorities are taking a more aggressive approach on transactions, on the review of transactions. They're also taking a more aggressive approach in terms of the recourses that they have under the income Tax Act like requirements and compliance orders.
And finally, if we have time, I would like to cover also the fact that we've seen in the past few years more and more situations where the tax authorities actually apply more gross negligence penalties, and also issue more reassessment after the normal reassessment period. Oops.
So before we talk about. I guess, the attitude of the tax authorities, I thought it would be important to maybe set the stage by talking about what we call the shift in attitudes towards tax avoidance. And to illustrate that, I think there's-- I guess, there's many ways to look at it. But one is to simply look at the statistics of the GAAR cases.
And I guess on this side of the table, we agree that, or generally agree that the Oxford Property decision has been-- there's been a shift since that decision from the Court of Appeal. And if you look at the statistics, we see that prior to that decision, a taxpayer would win 55 of the 54% of the cases at either at the trial level or the appellate level. And since then, it has shifted in favor of the CRA, whereas 63% for success for CRA at the tax court level and 86% success at the Federal Court of Appeals level.
The other way to look at it that illustrates this shift that I'm talking about is that prior to that Oxford Property decision, the Court of Appeal reversed GAAR decision from the tax court of Canada on only three cases. And that's three cases out of 24 in a time span of 16 years. And you have the three cases that got reversed. Since then and including Oxford Property, the Court of Appeal has already reversed three cases out of seven in two years. So at least I see this as an indication that indeed there is a shift in attitudes towards tax avoidance.
Now, the big question, so why do we see this shift? Is it because of more public scrutiny, because it's pretty clear that in the past few years there have been more and more coverage of tax issues, tax avoidance issues, you have the Paradise Paper, and the likes.
You also have taxpayers that were caused by the tax authorities not paying, what we call the fair share. So is it a question of tax morality? And before actually I get to the other points, I'd like to get maybe Al's comments on those first two bullets about why do we see this shift in attitude.
AL MEGHJI: Well, maybe this is-- maybe this business about a shift in attitude is just my way of justifying why we lost Oxford in the Court of Appeal. Maybe this is just my excuse for losing a big case in the Court of Appeal. But I think what's happened-- and if you look at what's happened, generally over the last decade in politics is we've become a society where there's a lot more populist politics, a lot more stuff about whether corporations are behaving immorally, whether they're paying their fair share of taxes, whether they're respecting environmental policy.
This idea of public corporations and their conduct has become the subject of a lot of public discussion in newspapers and in popular discussion. And it's not surprising that one of the things that has come up is, are corporations paying their quote unquote "fair share" of taxes. And then you see these cases like Starbucks all over the papers, and Loblaw which are in the US and Europe. And then in Canada, you see cases like Cameco which were all over the papers.
And what's happening is that the public is-- the public sentiment refuses to accept the taxes-- this technical subject matter where there are rules, and parliament writes the law, and taxpayers comply with it. Which is the way that tax law has been thought of for decades, that has changed. Now you have a lot of public interest organizations which don't accept that narrative of tax law. They think that tax law engages some fundamental moral questions.
So you see stuff like-- we were arguing in Cameco, there was a story in one of the papers in one of the news outlets. Where somebody took the total amount of tax that was on the line and wrote an editorial about how many MRI machines this tax could buy, or when the Cameco litigation was proceeding some public interest organizations had billboards from when you leave the Saskatoon airport, where Cameco had offices. And you drive to the Cameco offices, there were big billboards paid for by certain so-called public interest organizations which said, Cameco pay your fair share, stuff like that. And you could see this on big billboards
And so what was happening is that there's a reaction, a political reaction, a populist reaction against the system of law or a system of tax law where they're basically-- there's basically a refusal to accept the idea that this is all about the rule of law, and it's all about parliament making laws, companies complying with it, and judges deciding what the law is. And it's taken on this larger moral narrative.
And history teaches us-- this is not a new phenomena. History teaches us that courts ultimately start reflecting public morality, because they want to be viewed as legitimate institutions. They want the public to have faith in them as institutions which-- they don't want to be too far on the wrong side of public opinion. You've seen this in social issues. You've seen this in issues of human rights, equality.
This is just a continuation of that narrative in an area that's previously been immune. And therefore, courts are beginning to echo back some of that thinking. And that's why I think the paradigm shift has begun. My own view is it's going to get a lot stronger. And courts are going to start shifting much more in that direction before it stabilizes.
And if you want to see that in stage, you just need to look at the decision making in the tax cases in New Zealand, in Australia, in the UK, because they're way ahead of us. They have moved far closer to that way of thinking about tax law. So I think that this is happening because of a larger underlying current.
Which means, and I'm just going to say this and then stop my long winded answer, which means that we have to think about these issues differently. Meaning the days when tax lawyers sat around, and cited a statute, and pounded the table and said, well, the words say this. So I must be right. That's passe thinking. That is not creative. It doesn't reflect the way that courts think. And it's not the way that we should be thinking about tax law anymore. It's not the way that we should be making decisions about tax planning anymore.
LOUIS TASSE: Before moving to the next bullet, Marshall, if you could care to comment, I mean, you were on the bench for a number of years about those first two bullets public scrutiny, and the tax morality in the courts.
MARSHALL ROTHSTEIN: I'm just getting over a cold, you'll excuse my coughing, and tried to talk with candies in my mouth. Just to pick up on what Al said, I agree with him that the courts are in hiding under a rock. And they are-- I don't want to say they're influenced by public opinion, but the courts may be ahead of public opinion. It may be a little behind public opinion, but they can't be too far out of line with where public opinion is because their judgments have to be credible.
And if the judgments that come out are not credible to the public, the court loses stature. And it creates a problem for the judicial system, it brings the judicial system a little bit into disrepute. So the courts-- as I said, I don't want to say they're influenced by public opinion, but it would be wrong to say that they're not aware of it.
Al is right, there was a time. And it was a comfortable time for me, because I believe that when you were-- when judges assess legislation, whether it be tax or any other area, that they read the words, they look at the context, and they look at the purpose of legislation. And they try to figure out what it means. They look at the facts, and tax, they look at the transactions. And they bring an objective view to where their decisions should be.
And in Shell-- in the Shell case that Al argued, the court was very clear that it didn't matter if you were a corporation or a wealthy person that could affect different transactions, you were entitled to do what the law allows. And that has been up to recently, certainly, my view of the way the courts were and should have been deciding tax cases.
Under the general and avoidance rule, things were different. Usually, there were multiple-- there were often multiple provisions of the act that were being used with multiple transactions that courts were to look at and decide whether the object spirit and purpose of the relevant provisions were being adhered to. And so it was going behind the text.
And so that started-- that started a move away from the traditional role of judges of reading the text and trying to figure out what the text meant. Now you were under the text, looking at object and spirit of all of the legislation. And so that itself, the fact that the GAAR was there and that there were more and more cases being decided under the GAAR was perhaps an influence on the courts to start, perhaps, looking a little more broadly at the way in which they looked at legislation than they did before.
Just on the question of morality, these are civil cases that we're talking about, when we're talking about tax. I mean we're not talking about tax evasion, and criminal prosecutions, and things like that. So when we're talking about civil cases, we have-- judges have to be careful not to introduce, overly anyway, morality issues. That's not always easy in terms of public opinion.
This discussion about fair share, I hate that, because fair share-- what's fair to everyone in this room is going to be different because of their own personal positions. And Western share means is that we want somebody else to pay more. That's what fair share.
So I'm skeptical. I don't like this notion of fair share, but it's out there. That's part of public opinion, and it's a reality that you have to face. But in the end-- but in the end of the day, courts have to make sure that their judgments are credible and are receivable by the public. And that's partly what's affecting the nature of the way the judgments are written.
LOUIS TASSE: Before I throw it to Mark, on the notion of fair share, to me it doesn't mean anything, because fair share-- what's the measuring stick? And who's going to be applying this test? And we're talking about just taxpayers in Canada? Are we're talking about taxpayers in Canada and abroad? To me it's a red herring.
But I think it illustrates what Al was talking about when he was saying that there might be some populist views that are more, I guess, prevalent in the world. And it invaded the tax base. Mr. Brender.
MARK BRENDER: I think fair share is measured by the sophistication of the taxpayers planning, frankly. I think the reality is that there has been this paradigm shift. The world has changed. And that's important to take away in case you haven't experienced it personally-- important takeaway from this, because recognizing this shift will inform the way you approach tax planning going forward and the way you approach dealing with tax audits and tax controversies generally.
This issue of populism or fiscal morality, it finds its way to the bench. And it manifests itself by the bench by the courts taking a different approach in my view as to how they are interpreting the law. It used to be-- tax planning 20 25 years ago was much more formalistic, was essentially like a shell game. We'll move the pieces around this way and that way and we'll get these nice tax results.
And the courts were largely following a very formalistic approach to interpreting the act. Now, what we see is that it's not just GAAR, but the court's approach is much more-- taking much more substance over former approach to tax planning.
And that's really a significant change, because a lot of tax planning that was done 20 years ago was done in an era where values were different, where fiscal morality wasn't an, issue where the courts view tax planning was much different than the way they're viewed today. And those cases are being judged today by the standards of today.
And it makes it very difficult, on top of the fact that provincial and federal governments-- provincial governments and the federal government need to raise revenue, OK, so that-- so they-- and they have all these weapons in their arsenal, these weapons of mass destruction in the Income Tax Act where they can, I can say, ingest, but they have weapons where they can impose penalties, gross negligence penalties, sham penalties, and request documents that can make life very difficult for taxpayers.
And so if you're going to do sophisticated tax planning, you better be prepared to have a sophisticated defense, and be prepared to pay some sophisticated fees to defend your tax planning. And the government is testing the limits of these powers. And we see this every single day in the courts. And it will come out from the slides, which I'm probably going to knock off in these comments, a couple of slides in these comments.
But the reality is that every single day when the cases are released, there's always at least one case dealing with penalties or opening statute [INAUDIBLE]. That's we see it. And that's a real important battlefield. So I think that this putting in context where we are today-- and for businesses operating in Quebec, we have the dual pleasure of dealing not just with the CRA but with the RQ.
And so we have as many files on the go right now, where aggressive assessments are being issued by Revenue Quebec. Where years ago, we would have anticipated or we would have expected Revenue Quebec to just sit on the sidelines and let the CRA do its thing. And then will jump in and do a consequential assessment.
Well, they are out there in droves, very aggressively auditing, just as aggressively as the CRA. And interestingly, they're taking these cases to court. You have more cases coming out of the courts now than you ever did. And it's only going to grow, and we see the stockpile of cases growing in the Montreal office with revenue-- arising from Revenue Quebec audits.
And the Quebec courts have not been particularly friendly to tax payers. And in particular, come back to sophisticated tax planning, this your fair share is really dependent on the level of sophistication of the tax planning. The cases that are going through the courts, to Quebec courts, where corporate, tax payers, businesses have engaged in complex tax planning, I think the record is 0 wins for taxpayers.
And when you get to the-- and when you get to the Quebec court of appeal on any complex tax planning, the Quebec courts have been very unfriendly to taxpayers. Iberville is an example, doing tax planning where the words of the act produce nice benefits, double CBA for the taxpayer. They did some planning to use off-year end to create deferrals and to minimize taxes. And the courts just are not impressed by the shell game. They're not impressed by the strict words the text of what the provision says.
The Quebec courts, and then we see it more in the federal courts as well, the Quebec courts are simply looking at what did you do? It doesn't-- it looks too good to be true. And if it looks too good to be true, then it is too good to be true. And the courts are coming down hard on taxpayers, yes.
LOUIS TASSE: OK, so we did one bullet.
MARK BRENDER: Yeah. But I knocked off ten points so--
LOUIS TASSE: So I guess the second thing that we want to talk about is what we see as being a shift of the burden, like when you apply GAAR, it's a three step process. And the last step is to establish whether there was a misuse or an abuse of the act or a provision of the act.
And the Supreme Court said that this burden lies with the crown or with CRA. And the question that I will throw to you guys is, well, is it still the case? Following Oxford Property, are we still comfortable that the courts are applying the teachings of the Supreme Court. I'm going to be start with you, Al.
AL MEGHJI: So look, when you read all the Supreme Court cases starting with Trustco, Copthorne, and then all the judgments that Marshall Rothstein wrote, which pretty much makes up the law of Canada on GAAR. But what was the Supreme Court struggling with? Because these cases were a struggle, they weren't easy cases for the court to decide. And you saw some disagreements in cases like Lipston, et cetera.
What was the heart of their struggle? The heart of their struggle is that they're taking this language in the statute which says abusive tax avoidance is something that's a misuse or abuse. Well, this language really tells you nothing about where the line is between acceptable tax planning and abusive tax avoidance. And so the court struggled for many years to write a legal standard.
Because what was the concern of the Supreme Court? The concern of the Supreme Court is that the GAAR should not devolve into some sort of a smell test. So that your fate turns on the judge you get. So if you get a judge who believes that taxes are the price we pay for a civilized society, you lose. And if you get a judge who thinks taxation is expropriation of private property, you win.
So we can't run a system that way. We need a legal standard that could be applied consistently from taxpayer, to taxpayer, to taxpayer. And there was some predictability and certainty. So that's why the court wrote Trustco as well as they did. And Marshall's judgment in Copthorne-- Marshall Roth's judgment in Copthorne. I get to call him Marshall now. I didn't get to call him that before
In Copthorne, you see that these decisions are very careful in their saying. This is a legal standard, and it's not a smell test. And it worked for a while, but then what started happening is that the crown started losing a lot of cases that a lot of people thought they should win.
So you saw some of those-- you saw some of these provincial income shifting cases, Iberville was decided by the Quebec Court in the particular way that it was. But we did a case in BC which was exactly the same transaction. And the BC Court went with the taxpayer.
You saw Husky Oil a court case in Alberta, which was another provincial shifting case that we were successful and the taxpayer won. A lot of these decisions started coming out, and the crown was losing cases that a lot of people thought, I'm not really sure that this is acceptable tax planning.
So there was some doubt being cast about whether the GAAR was actually effective in stopping what was perceived as abusive. And I think that doubt hit its high watermark in Oxford, when the tax court judge decided that the Oxford transaction was just fine.
And then when we went to the Court of Appeal, the judgment to me almost reads like the Court of Appeal throwing up its hands and saying , enough, we're not allowing so many of these transactions which appear to us to be over the line to keep succeeding, because the Supreme Court has drawn such a strict line and a high threshold for the crown to meet before something is abusive.
And so I think that we are seeing a shift. I think the shift is not just in who bears the burden of proving abuse, I think that's-- that doesn't get to the heart of it, but I think this is my prediction. And let's see if over the next few years we see this come true.
I think what's going to happen is the courts are going to start saying, they won't say it explicitly what's going to animate their judgment is something like, can you tell me why this result is OK? Like seriously, your client did this and you think that's acceptable? That's not a very legal-- that's not a very legal discussion. That's a very visceral reaction. That's a very often--
LOUIS TASSE: Not policy driven.
AL MEGHJI: It's not policy driven, it's almost like-- when we teach advocacy-- so Louis and some of the litigators, last week we had a seminar for our young litigators where we were talking about argue these cases. And we said to them the way you need to argue these cases is you need to be able to go home and persuade your spouse that your client did the right thing.
If you can't persuade your spouse that the client did the right thing, you're going to lose. And you're not going to go home and say to your spouse, well, Section 245 says that something is a missabuse unless the policy works that way. They are not going to listen to that. They don't care about that. They got a gut feeling that your client did something bad.
LOUIS TASSE: That's something that doesn't work for me, because everything the taxpayers do, my wife says, yes, that's perfect.
AL MEGHJI: All right, so I think we'll take a reasonable [INAUDIBLE].
[LAUGHTER]
I've never met your wife. My wife is basically left of Karl Marx. So she was until she started seeing her personal tax rates, then she is like-- but my point is-- my point is I think you're going to start seeing that.
I think you're going to start seeing judges going-- I don't actually-- I'm not-- because judges are not-- they're not-- there's a creeping sense where they're saying but not even accepted standards show me what that means is that the advocacy of these cases has to be different the advocacy on misuse and abuse has to be different has to be more creative. It has to be more supple it has to appeal to first principles it can't be the cut and paste tax lawyer approach of opening the Green Book and saying, this is what it says there's a shift happening on the way that standard. It's going to be applied
LOUIS TASSE: OK, Mark and Marshall, then into Al.
MARSHALL ROTHSTEIN: I'll briefly say that I've been married for 53 years, and I haven't been able to agree with my wife about the time of day. So there's no-- Al's test wouldn't work in my house. But I can only say this, that my first case in under the GAAR was OSFC, when I was with the Federal Court of Appeal. It was a very hard case, I have to admit to you.
But the one thing that OSFC said and that has survived through all the GAAR cases, at least that went to the Supreme Court, was that while the obligation was on the taxpayer when it came to tax benefit and avoidance transaction, the obligation or the onus was on the government when it came to abuse and misuse.
And that we said the government had to be able to demonstrate a very clear policy, because they were going behind what on its face the act would allow taxpayers to do. And if the courts are moving away from that now, they're moving away from jurisprudence that has stood for almost 20 years. And it will be unfortunate.
MARK BRENDER: I think that where we are with GAAR and the courts is that I think the courts approach GAAR as a smell test. They look at it, they look at the results, they ask themselves, does this offend my sense of fiscal morality, is this the right result? And then they can easily weave a judgment to justify that result. I think by and large, that's what's been coming out of the tax courts. And that's just coming out of the Quebec courts, be it GAAR or Sham or some other doctrine. That's reality.
And so when you're engaging in tax planning, you might have your 50 page opinion from big law or big accounting firm. The fact of the matter is-- and that opinion might legally, technically, be correct. But when you get-- when you're testing that opinion in front of the judge who's not impressed with the outcome, there's enough-- the provisions of the act are malleable enough that you can get to the result that you want.
So I think it's a very-- very much factor in this results oriented approach in your approach to tax planning. And in your evaluate your assessment of the merits of your case before court.
LOUIS TASSE: And also to that point, I think it also varies a lot depending on the identity of the judge. And like Al said, some judges might be more lenient, others might be more stern. And if you fall in front of a judge who doesn't really like tax avoidance, then you're essentially caught in a very bad place.
And sometimes-- the example I like to give is former Chief Justice Bowman. Chief Justice Bowman was known as a taxpayer friendly judge with one very notable exception, tax deduction of interest. For some reason, he had a thing above the deduction of interest. And a bunch of his cases, I'm thinking of [INAUDIBLE]. I'm thinking of-- Singleton? That was him, Singleton, that ended up in the Supreme Court.
For some reason, he had a hook on those that he just couldn't let them go. So obviously that plays-- that plays a lot on what happens. And mind you, in the days-- if we go back to the GAAR cases, in the days where the Court of Appeal was hesitant to reverse a decision from the tax court, it was even a greater burden. But now it seems that the Court of Appeal at least recently has been more open to reversing GAAR decisions from the tax court. So it may be that it doesn't play exactly the same type, it has the same consequences.
Which regards to the last bullet the certainty, predictability, and fairness-- well, I think for me, it's pretty clear that inasmuch as the test has become the smell test, you can throw that one away. Because as Al mentioned, it was originally what the Supreme Court said is like, you're supposed to find what is the policy behind provisions that you're looking at. And then establish whether that policy was offended or not.
And when you read Oxford, I read it again this week. It's not that clear which policy, like what is the underlying information that allows the court to say, well, the policy for this provision is this. And it has been offended. And as Al mentioned, it's really a result oriented analysis that we see in every step of the way, every provision that were looked at like 197 and others. Chief Justice Noel, every time said that, well, this is a result that offends the provision. Guys, anything to add on the certainty, predictability, and fairness?
MARK BRENDER: I think you should keep moving, because you've got a bunch of stuff--
LOUIS TASSE: Hey, it's been only 40 minutes. So I guess, one thing that also I wanted to cover is the fact that we're in a very specialized field and facts matters in front of the Court of Appeal and the Supreme Court. It's a different beast altogether.
And at the moment, I think it's fair to say that we don't have any judge at the Supreme Court who has any interest in hearing-- or particular interest in hearing tax cases. And I would venture that, Marshall actually you're probably the last one who was on the bench with an interest in tax cases.
And the Court of Appeal at the moment, we have three judges that do have tax background. In Quebec, the only one that we do see is Chief Justice Noel, because he's the only one who can hear a case in French. And the last thing I wanted to talk about was the fact that we, in tax we don't get that often leave granted at the Supreme Court. And Marshall, maybe I'll ask you to explain how it works, and what your experience has been while on the Supreme Court.
MARSHALL ROTHSTEIN: I'll just take a few seconds, I hope, to describe the leave process. The leave materials are filed by the parties, the application for leave. It goes to a staff lawyer. And the staff lawyer writes a memo to the judges summarizing what the lawyers have said, summarizing the trial or the Court of Appeal decision, and making recommendations about whether to grant leave or not.
And I might say that 30, I think 30 or 35% of the leave applications of the Supreme Court level are from self represented litigants. And so it's very easy to deal with those very, very quickly. For myself, I found another third were able to be dealt with pretty quickly by reading the lawyers-- the staff lawyers memo.
When it came to tax cases, I always obviously, read the staff lawyers memo. But I then read the materials and the case-- the decision being appealed. Because frankly, because I was interested. And in tax cases-- sorry, let me just go back and say, the leave process is that leave applications go to a panel of three judges.
And if the three judges agree, then they will recommend that leave be granted. If they agree, they may recommend that leave be denied. A memo will go around to all the judges. And unless somebody has some particular objection, which is very, very rare, then a decision will go out either granting or denying.
It's where the panel is split, that the leave application goes to a court conference that takes place once a month. And at the court conference, the rule-- unwritten rule is that if you can get four judges to agree to grant leave then leave will be granted. And so when it came to tax cases, to be very candid with you, it was very difficult to get my colleagues to agree to grant leave in tax cases.
I can't remember this for sure, but I'm almost positive that when it came to Lipson and it came to Copthorne. I'm sure that I requested that leave be granted. I believe that my colleagues and the three judge panel opposed, and it went to the court conference. And if you plead, and beg, maybe cry, maybe they will have mercy on you, and they'll grant leave. And they did grant leave in those cases.
And I suppose maybe I was able to make some argument about something new in those cases. But that at least attracted the support of three other judges, and so leave was granted. But I know that with-- there was a case of Funding Settlement dealing with the residency of a trust. And that they did not want to grant leave on that.
But the Supreme Court of Canada had never decided a case on the residency of a trust in the case of funding. It was a foreign trust, a foreign trust outside of Canada. But there's also the question of what province a trust might be resident in.
So I thought it was quite important. And I think I barely got four to agree, and so leave was granted and funding. But as a general rule, the judges didn't particularly see a lot of interest in the tax cases. I could go through some other examples to tell you about-- but without dragging it out.
I can say that if there's no judge that has a particular interest in tax cases at the Supreme Court, it's going to be pretty difficult for leave to be granted. Now, they did grant leave and they will hear an appeal in the MacDonald case, which deals with hedging and whether certain losses in that case were on income or capital account.
And my view about why they granted leave in that case is that there had been precedent very, very old precedents dealing with grain trading futures and things like that from almost 100 years ago, before there was a capital gains tax in Canada. And the courts made certain points in those decisions.
And I think that probably now, the Supreme Court decided that it was time to update that law in view of the fact that hedging is quite profound these days, and because perhaps they were looking at clarifying the law. So there will be cases where leave will be granted, but it's not easy.
LOUIS TASSE: OK, before we move to the next slide, there's two things, I guess two comments that I had. The first one is that from the outside looking in, it's hard to see a logic in terms of the cases that the Supreme Court agrees to hear and the ones that are denied.
Al mentioned Developpements Iberville. Developpements Iberville is a decision from the Quebec Court of Appeals. That is completely the reverse of the veracity decision from the British Columbia Court of Appeal. So at the moment, the state of the law applying the same provisions is different in Quebec and in the rest of the country.
And I would have thought that this would have been a matter of national interest to kind of, OK, so let Canadians know which way they can turn. But like I said, this particular one was denied. It was also denied in Oxford Properties, obviously at the firm we were very hopeful that it would be.
One thing that I forgot to mention about Oxford Properties, and I guess it goes to the team of CRA being more aggressive in its position without going into the specifics of the case, I just need to mention that in that case [AUDIO OUT] and avoided paying income tax on recapture and on a capital gain.
Now, most of you know that the recapture is taxable 100%, capital gain 50%. But the GAAR assessment was 100% of both. And this is obviously very aggressive. And I'm a bit-- actually as a former crown prosecutor, or Department of Justice lawyer, I'm a bit surprised that they would actually go down the path and make this kind of a punitive provision.
Are we OK? OK, so we're up to slide nine. I also wanted to talk about-- and Mark alluded to that in his first intervention. We do have a lot more cases involving the doctrine of sham. And Sham comes from an old UK decision that actually has nothing to do with tax.
And that particular decision was incorporated in Canadian law. And you had one famous quote from the Supreme Court in the Stubart Investment case that you could see on the slide, that talks about an intention of deceit to lead the tax collector away from the taxpayer or from the true nature of the transaction.
And as an aside, Stubart led to the enactment of the GAAR on one hand. And on the other hand, that case went-- in those days, you would go from the Tax Court or the Tax Review Board to the Trial Division of the Federal Court, and then up to the Court of Appeal, and then to the Supreme Court.
And Revenue Canada had won at every step of the way, but unfortunately for them, they lost once they hit the Supreme Court. And in that case, they had actually argued both sham and ineffective transaction. And those are two arguments that we've seen more and more often being raised both by CRA and Revenue Quebec.
Now, on this slide I gave you four examples of the recent use of sham. Cameco, Al was the lead litigator of a pretty sizable team of lawyers from Osler. And that case-- Osler has won that case. And CRA has decided to drop the sham argument. And Al we'll expand on that later on.
We also have another case out of BC, which dealt with the creation of a trust in the province of Quebec. It was actually the Quebec Truffle Planning, which by the way has been nipped in the bud by the Quebec government. But again, the taxpayer won on the basis that there was no sham. And for good measure in that case, CRA was also arguing that the trust was not validly created. That it was an ineffective transaction just like CRA or Revenue Canada had done in the Stubart case.
Finally, two cases from the Quebec courts. Those cases were won by Revenue Quebec, but when you look at the facts, they were pretty bad. You had a guy who pretended or argued that he made a donation to family members. And he did that at the Christmas party, hey, I'm giving you money, give me-- and you're going to give me the cheque back because you're just such a nice guy. I mean, clearly those-- the fact pattern in those cases was pretty bad. So Al I'm going to--
MARK BRENDER: Laplante is a tax court case, Kaplan's Quebec. And you mentioned the Lee case, that was a tax court case with an inbound provincial planning from BC into Quebec. And we won that case. There was interestingly, two cases from Quebec going outbound into Alberta. And those two cases were tried, were heard at the Quebec courts. And taxpayer lost both those cases.
So you also have inconsistent treatment in the two cases between the two jurisdictions Federal and Quebec. Facts were different in both cases, but nonetheless, it shows you how aggressively Quebec is going after these kinds of plans. And they have no patience whatsoever for the need to define legal arguments. They just look at you had a gain of $10 million on day one, and at the end of the day that game was outside of Quebec magically because of some tax alchemy. And they wouldn't have anything of it.
LOUIS TASSE: So Al, I'll throw it to you to maybe make some comments about the Cameco case.
AL MEGHJI: Well, I think most of what needs to be said about Cameco has been said. But I'm just-- I think the interesting development in Cameco is that the crown didn't appeal the sham argument. So the decision of the tax court and Mr. Justice Owen on sham is the law, particularly because that judgment is entirely consistent and relies on the Supreme Court's decision in Stubart.
So I think this is a bit of a setback for the government, because what was the government's strategy when they invoked sham? I mean, the law of sham in Canada is completely different from the law of sham in the United States. In the United States, the law of sham-- imports, concepts of economic substance, and business purpose. Transactions which have which have no business purpose or transactions which lack economic substance are routinely found to be sham transactions in the United States courts.
And the Canadian courts, and Stubart in particular, have refused to accept that notion of sham. And they basically said, in order for sham to be found, it is essential that the taxpayer have an intention to deceive the minister. It's very close to an allegation of fraud. And Mr. Justice Owen said that in Cameco.
So what their strategy was in Cameco was to see if they could move the law closer to the American Law. And then argue that transactions which were motivated entirely by tax planning and have no real commercial purpose were essentially sham transactions.
So I'll tell you-- so that loss to them is extremely significant. But they haven't entirely given up on it. So I'm going to tell you about a case that's presently in the courts. And I'll take only two minutes to bring this up. This is important. So it'll tell you where they are, and this is just tells you about how they see sham.
So you have a case that's in the courts right now, where you have a company that is owned by a bunch of tax exempt. And the tax exempt-- so this company that is owned by the tax exempts owns a business. And what happens is that the tax exempt decide to capitalize the operating company with debt. Almost all-- it's highly leveraged. So it's almost entirely debt funded.
And of course, so what happens is that the income from the business is being paid out to the tax exempt via interest. And they don't like that, because the problem for them is that the tax exempt are taxable. So the operating company's income is all ending up in a tax exempt by interest expense.
So they have attacked it on the basis of sham. And their argument is that what the taxpayer put in as debt is really equity. And they say that the taxpayer is representing to the minister that this is debt, but it's economic reality is that it's actually equity.
Now, when you look at the instruments, it's a loan. It's debt, there is interest payable. But they're saying, well, but if you look at the way that they ran the business and the way they were conducting things, it really was in the nature of equity. Now, we know in the United States there's a law that deals with when you would recharacterize debt with equity.
In Canada, we don't accept that notion of characterization of debt as equity. We're more of a form based jurisdiction. We look at the legal relationships. We look at the contracts. We don't tear apart the balance sheet to see what was quote unquote, "really going on." So they've invoked sham, and the case is presently in the courts.
Now, this appeal was filed before Cameco came out. And we'll see whether they press on, whether they-- because I think that-- my view is that I'm hopeful that Cameco is a bit of a problem for them. I'm in fact hopeful that it's more than a little problem for them, that it's a big problem for them.
But so you see that's a case where they have actually raised sham to-- and the allegation of deceit is, what's the allegation of deceit? Well, you are telling the minister this is debt when it's really equity. But I'm saying, but it is really debt. So that's an example of how the doctrine is being used.
But my own view is that their decision not to appeal sham to the Court of Appeal in Cameco, seems to me that the court will say, well, in an appeal Justice Owen's reasoning, that's the law. So I hope that this dies down in the next little while.
LOUIS TASSE: And the reasoning of Owen, he quoted himself in Lee, the next decision. But before we get to Lee, and I sense that Mark has a few comments to make. And I want to talk about the last two bullets on that slide, because I was-- last year, I was on a panel with Al to talk about Cameco. And my knowledge of the file is that I had read it.
And the reason I say that is that it was argued more than a year before I joined Osler. So I didn't know anything about the case other than what I could read in the decision. And the first thing that struck me when I read the decision, and to be honest I didn't read all of it. There's some of the [INAUDIBLE] stuff that I zoomed by. Because it's a pretty lengthy decision. It might be the longest decision that was ever issued by the tax court of Canada.
But all kidding aside, so I was looking at the sham argument. And first of all, I did not understand why they raised it. Because if you're familiar with transfer pricing, they issue like a straight up transfer pricing assessment saying that, look, you undersold. But they also raise the recharacterization provision of the transfer pricing provision. Which is to me akin to a sham argument. And I was-- for the life of me, I did not understand why they would add sham to it.
The other thing that was pretty clear to me is that Justice Owen was annoyed when he had to deal with the sham argument. And I actually asked Al if he agreed with that, but from a reader who was not at all involved in preparing the case, that's what I saw in reading his decision. And it may be that this tainted the way that he saw the straight up application of the transfer pricing provision.
And I guess the last bullet is also important. And I guess, it goes to Mark's point that we see this even more so from Revenue Quebec. If they see a planning that works, they think that, well, if it worked, then there was a tax motive. And then it makes your transaction a complete sham. And Owen said that in Cameco, when he said it again in Lee. It's not because you have a tax motive that the transaction automatically becomes a sham.
MARK BRENDER: And I agree with Al comments with respect to Lee and Cameco not appearing on the sham point where we are. But I think that we can still expect the Revenue Canada and Revenue Quebec, in particular, to try to move the needle on what sham is. We have the sham rules, which were introduced by Finances Quebec, this summer. Don't turn a blind eye to those.
We see sham being raised as an argument in many cases. And it's likely that given that there's a penalty associated with it, given that where sham is applied there are severe consequences; opening of statute five years, prohibition and participating in government contracts. It is a real weapon. And that prohibition applies from the assessment not from a final determination by a court.
So sham is, I think, going to get a lot of airplay in Quebec. And I think that we need to be very mindful of that. The one case that I think is worth reminding people about, because shame can arise in circumstances that you might not really think about as being sham like.
And it just makes me think of that commercial, ShamWow. You know the ShamWow, the sham? Yeah, it's not so "wow" in tax matters.
But in the [INAUDIBLE] case where a taxpayer with a huge with a huge accrued gain sets up a series of transactions, all technically sound, transfers the asset to a spousal trust which is set up offshore. So the gain is effectively ruled out of Canada.
And then the trust disposes of the shares, realizes a huge gain. And the trust happens to be resident in Barbados, and under the kind of Barbados treaty claims, a tax exemption. And so that case was defeated based on sham.
Why was it a sham? Because the trust was-- a trust deed was created, the transactions were legally effective, everything was done. And the reason the court held that it was a sham was because they said well this trust which you called a discretionary trust, and the terms of the trust provided for discretions to the trustee.
Ultimately, that when you look at the series of transactions, it was all preordained. And really, there was never any intent to exercise discretion. All these transactions were just going to happen there was a domino effect. And once you push the first domino, everything else was going to follow. And so in that case, the court-- this is at the Federal Court of Appeal applied sham and basically disregarded the trust fund defeats the whole tax plan.
So this can apply in many different contexts. When you're putting up sophisticated structures, domestic international planning, foreign affiliates all over, corporations being set up. And if these corporations are not being respected, are not being treated the way they're supposed to be treated, again, they're not just-- they're not just shells on-- they're not just pieces on a chessboard where you just move them around.
I can see that-- I can see revenue taking a run at corporations in certain circumstances being a sham because the taxpayer's not really respecting its existence, not really treating them the way they're supposed to be treated. They just have them as boxes tick and move on. So I'll pause there.
LOUIS TASSE: Marshall.
MARSHALL ROTHSTEIN: I'll just make a brief comment. You know sham is essentially an allegation of fraud or deceit. And at least traditionally, when somebody pleads fraud or deceit in a civil action, the burden and the hurdle should be very, very high.
And I think that many judges, and this may perhaps be the reflection that Owen had when he looked at the sham argument in Cameco. A judge will look very skeptically at a sham argument, unless it's pretty obvious that there was deceit or fraud of some sort.
So I would say this, CRA is going to have to be very careful in the way that it alleges sham in various cases. If it really, really is a legit sham all over the place, I think that there will be a loss of credibility in their arguments. And that will return to their favor. So while it appears that they are arguing is more, it may lead them to a pretty risky area.
MARK BRENDER: Marshall, I would hope that because in Quebec the consequences of having sham applied are so severe, because there's a 50% penalty I believe and the extension of the opening of statute five years, I would hope that courts would actually raise the bar for when they would apply it.
MARSHALL ROTHSTEIN: Well, the bar should be high when in civil cases when fraud or deceit are being argued. It's a very serious argument to be made. It's not just a run of the mill argument. And court should be taking a very, very careful look at that before they quickly agree that there's a sham.
LOUIS TASSE: Thank you, Marshall. I think this is a nice segue way into the next slide, because Mark touched on this, the first bullet about the new measures that were announced by Finances Quebec. And as Mark mentioned, if an assessment based on sham is sustained there's going to be an automatic 50% penalty. Which to me is strange, because if sham entails an element of deceit, so there's an intention to present something that is different from the reality.
So I struggle to see situations where an argument of sham would be sustained, but gross negligence penalty would not. But still, Finances Quebec decided to do that. At the same time, they decided to increase the automatic GAAR penalty from 25% to 50%.
And I guess to Mark's point, and maybe I'll throw that to both Al and Marshall, my take on it is that, and I guess Mark agrees, obviously, given the consequences that courts might be more reluctant to conclude that indeed there is a sham or that GAAR is applicable. So Al, Marshall, you want to begin with [INAUDIBLE].
MARSHALL ROTHSTEIN: I'll only say this, I don't want to be repetitive, but it should be a high hurdle for sham. In the case of the GAAR, the way the cases have rolled out, they have made the point that the abuse has to be based upon a clear policy of the act.
And so it would strike me if that is the focus, that unless the policy is found to be totally clear or at least I should put it this way, the court should only find an abuse where they are satisfied that the policy is clear. If they come to that conclusion, then the consequences will follow whatever they are.
But the question is, is the policy clear in the case of the GAAR and in the case of sham, does it meet the high hurdle? And if it doesn't meet the high hurdle, that's the end of it. If it does, again, the consequences follow.
LOUIS TASSE: Well, I guess it remains to be seen, but I know, for instance, that Mark has a number of clients who are dealing with Revenu Quebec, where they are raising sham allegations in a very plain vanilla structure. And you-- when you talk to them, you bang your head on the wall because you get the feeling that you are talking to a wall. So I guess, we'll have to wait and see what the Cameco and Lee decisions will lead to.
I would add, before we move to the next topic, that the [INAUDIBLE] case that Mark was referring to was actually the linchpin of the argument that was made by the crown in Lee. But there was one very significant difference. In Lee, you had a very experienced trustee whereas in [INAUDIBLE] you had a guy who was 19 or 20 years old, I forget.
And his experience in trust matters was that he was asked to read a book about trust, and then may or may not have read all of it. So obviously, he was seen by the court as someone who was essentially a puppet that would just do blindly whatever the author of the trusts or the creator of the trust would ask him to do.
The next thing that I wanted to talk about in that we've seen from Revenu Quebec is loss consolidation transactions that are being disputed by Revenu Quebec. So essentially, a loss consolidation is that within the group, you would have corporations that are in a profitable position and others at a loss position. So how do you want to balance that out?
So you carry on transactions that allow you to either transfer income from one corporation to the other or transfer tax attributes. And to be clear, those type of transactions have been going on for ages. And in the first memorandum that Revenue Canada at the time of the issuance of or the enactment of GAAR, the first memorandum that they issued on the matter to talk about what is acceptable what is not, included a paragraph confirming that loss consolidation within the corporate group was legitimate tax planning.
But nonetheless, we see, and when I say, we, I mean Osler in Montreal, two files that we are working on. The first one, the loss consolidation was done through the transfer of depreciable assets. So when that happens, you have recapture in the company that sold, the assets, which in this case was the loss corporation and then the profitable corporation with clean capital cost allowance.
Now one thing that is important to mention is that that particular transaction was actually reviewed and accepted by the Canada Revenue Agency. Also, the impact on the Quebec income tax was not even considered, and because the presence of that corporation that was profitable in Quebec was only 4% of its total interprovincial allocation.
Now, this matter was audited by Revenu Quebec. And they took three years thinking that GAAR applied, and finally they said, OK, we agree GAAR does not apply. But then they turn around and say, well, you purchase this asset but you did not do it for the purpose of earning income, ergo we're going to refuse the capital cost allowance claim.
Finally, they do realize that the structure was-- the way that it was structured, there was income that was paid. So they dropped that one and then they turned around and they applied to leasing property rules to that particular transaction. Now that case, we're still waiting. It was argued in April, we're still waiting for a judgment. If there's no extension of the six month normal deadline for the issuance of the judgments, we should have a decision I believe in December.
I see my team was nodding. So yes, sometime in December. But it's not the first time that I've argue a case in front of this judge. And my experience is that he keeps asking for extensions. So it might be a while. Before I move to the next one, another one Mark or?
MARK BRENDER: No, I'll just say that on loss consolidation. I mean, think of BEPS, base erosion and profit shifting. It's not just an international concept, it's a domestic concept. OK, so the provinces in Quebec, in particular, are going to be very sensitive to transactions that have the effect of eroding the Quebec base. So a large interest expense in Quebec paid out to a non Quebec taxpayer, for example, interprovincial management fees and the like.
Loss consolidation arrangements where the proportion of income between the loss co and the profit co are materially different. When you're doing the loss consolidation, you're moving income from a taxable-- from a Quebec taxpayer to a non Quebec taxpayer. That's going to be perceived as being problematic. So we need to be sensitive to the BEPS concept, if you will, in the domestic context.
LOUIS TASSE: The next example that we have in Montreal, again, it's a case that is in front of the Quebec court, the Court of Quebec I should say. And it's still at pretty-- like we're not even close to getting a day in court. But so in this case, the consolidation was done through an interest bearing loan.
So you have a corporation that is newly created. So it doesn't have any history, it doesn't have any assets. And it has this demand loan to-- issue this demand loan to a profitable corporation to the group. Now, the shares of that newly created corporation are transferred to another corporation of the group that is in a loss position. The corporation is wound up. So you end up with an interest deduction in the profitable corporation and interest income in the loss corporation.
Now in this case, the angle of attack of Revenu Quebec is to say, well, the interest rate that you used for that loan is too high. And their benchmark for that determination is the interest rate that the parent company, that has nothing to do with the transaction. They're not involved in the transaction. But the interest rate that this particular parent company could get on the open market.
And to me that's an argument that resembles the halo effect that we've seen in a case that you're very familiar with, Al, the GE Capital case. So I'd like to see if you have any comment, maybe Mark also on that particular argument in that context.
AL MEGHJI: Want to go first? Well, this is an area that there's two cases that actually speaks to this issue. One is General Electric, and the other one is a case out Alberta called ENMAX Energy. And the question of whether-- I think, I could be wrong, and my colleagues will correct me on this. Feel free to dissent from what I'm about to say, if I'm wrong.
But my impression is that this question of the reasonability of interest rate turns on whether when you're assessing reasonability you take into account implicit support. All of these cases have that notion of implicit support or what Louis calls the halo effect of the parent.
I think that in the context of international disputes such as GE, the law appears to be quite settled, is that you assess the reasonability of the interest. And you must take into account the so-called halo effect. And why is that? Because that's how markets will assess. If you go to a bank, they will assess the amount of interest they should charge you by reference to the amount of implicit support you're getting from the parent. So that's sort of the GE line of cases.
And GE is now really settled law, it's been accepted in the US, the OECD has accepted it, et cetera. So the question really becomes, when you're outside the international context and you're in a domestic context, when you're determining a reasonable rate of interest, should you take implicit support into account. Particularly, when somebody says, well, if there is implicit support, why is it unreasonable for the recipient of that implicit support to include as part of the amount of interest to pay some form of compensation for that support?
So that issue is unsettled. And I really don't know how the courts are going to respond to it. My advice is always on this issue, because it's so uncertain, is you need to argue these cases assuming a finding of implicit support. And then demonstrate that even with implicit support the interest rate was reasonable, which is what we did in GE. Because remember in GE, we lost the implicit support argument. But the court came back and said, well, you may lose it on the legal principle, but we were successful because we called expert evidence on the facts
MARK BRENDER: And I concur with that, not to dwell on implicit support, just like I said I agree. But I would say that bear in mind that these cases where interest rate is being challenged, these are transfer pricing cases, essentially, domestic or international. And so Revenu can attack those on transfer pricing. And that they are attacking these cases in, at least the ones I'm thinking about, they're attacking them because they see them as avoidance transactions, right?
I have a Canadian company that's profitable, I got a US subsidiary that's not profitable. And I have pricing between them, and there may be some intrical debt. And they don't like that shift of profits from Canada to the US, if there's an interest expense created in the structure.
MARK Resources is a perfect example of that. MARK Resources might have been decided differently, if it was a domestic interest expense case, but it wasn't. It was basically a loss utilization structure. So this is underlying the CRA's perception and as well the courts.
So they can attack it based on transfer pricing principles, implicit support, whether it was used for the purpose of gaining or producing income, or for the acquisition of property. There's a number of legs on which these can be attacked. But ultimately, they are viewed as avoidance transactions.
LOUIS TASSE: Yeah, so I'm not going to dissent on what you said, Al. But I will make some comments with regards to the case that we-- [INAUDIBLE].
AUDIENCE: In the [INAUDIBLE] case, what was the [INAUDIBLE] for your client to assess the interest rate?
LOUIS TASSE: Well, actually that's an excellent question. And it's going to go exactly to my comment. So in transfer pricing in theory, there is one answer that is supposed to be a precise answer-- in theory, I said Al. Now, when you're dealing with 21 C, like reasonable rate of interest, the reasonable amount does not necessarily have to be a precise amount. If it's within the range, it's going to be considered to be reasonable.
Now, in the case of our client, the interest rate is within the range that we could see on the open market. Now, we don't know if Revenu Quebec is going to argue that it should be a precise figure, whether it's median, whether it's like top quartile, mid quartile, we don't know at the moment. But the support that we have is that, yes, it is within the range. Does that answer your question, [INAUDIBLE]?
AUDIENCE: [INAUDIBLE]
Well, we have an analysis, yeah. And thank you for being the first one to ask a question. Maybe someone else will we'll jump in and ask questions.
MARK BRENDER: Maybe a waterfall of questions.
LOUIS TASSE: Oh, we have 40 minutes or less remaining. So this is actually the end of the first section. So I guess the key takeaways, I think you have figured out by now. But we are in a situation where there is a shift, at least, in the tax avoidance phase. We do see more aggressive positions taken by both CRA and Revenu Quebec.
And the last one is that-- I called it sideways attacked on legitimate tax planning that had nothing to do with the provisions that they're using to attack it, namely the tax-- the leasing property rules in one case and the interest deduction provision in the other one.
So the next segment is more aggressive use of administrative tools. And I've listed a number of decisions that were rendered in the past few years. Developpements Belarence, I thought was interesting because it's a case that deals with-- so CRA does an audit. They're not satisfied with the cooperation of the taxpayer. Eventually, they sent a requirement. They're still not satisfied with the cooperation.
So they go to the Federal Court and ask the court for a compliance order to force the taxpayer to provide the documents. And as part of the request, the order says and to provide in Excel format the list of transactions that were conducted by the company.
And of course, the taxpayer does not respond to that one. So now, there's another motion that is filed by CRA for contempt of court. And to have the taxpayer file in contempt, and the federal court said, well, you have the right to get the information but you don't get to choose the format in which you're going to receive it.
The next one, Montana. Again, it's actually a dispute about how the documents should be sent or received by CRA. Take it for what it's worth, because that's actually a case where there was a guerrilla war between the taxpayers lawyer and CRA that lasted five years.
And during that period, CRA was trying to audit the taxpayer and could not do anything. And the last straw was that they finally get a motion, or I guess an order from the Federal Court saying, OK, so you need to provide a list of documents. And when you read the decision, the list of documents is actually much longer than the decision itself, because you have schedules upon schedules of documents that they were looking at and looking for.
And at the end, so the taxpayer says, OK, so we have those documents there in 30 boxes. Come in and audit them at my premises. To which CRA says, no, no, no. Send us, we want them, we want to pick them up, or we want you to ship them to us. To which the taxpayers says, no.
And that's when there was the final order by the court, the Federal Court saying no, no. You had a very reasonable solution that was provided by CRA, who was offering to send a courier to pick up those three boxes and you said, no, this is unreasonable. And so I mean, like I said, take it for what it's worth.
A motion that we're going to talk about in greater detail in Cameco where in the middle of the tax court case, you had a motion to compel Cameco to offer 25 employees for interviews. And as you can see there, I guess we lost that at the trial level, but won--
AL MEGHJI: We won at both levels.
LOUIS TASSE: No, no, I'm talking about-- on the administrative side.
AL MEGHJI: Yes, we won at the trial level too.
LOUIS TASSE: OK, so I'm just taking it for the other one. I'm mistaken for BP Canada Energy, sorry about that. And the last one that you must have heard time and time again, so a motion to obtain the uncertain tax position and working papers of the BP Canada Energy. A case that was unsuccessful at the Trial Division and successful at the Court of Appeal.
The other one, Iggillis Holdings, trying to get their hands on the legal opinion. Again, they were successful at the Trial Division. But CRA lost at the Federal Court of Appeal level. And I think it's important to mention that CRA actually asked the Supreme Court for leave in that case but it was denied. Another example is the due diligence report that we have in the Atlas Tube file. Taxpayer lost at the Federal Court. But the matter is before the Court of Appeal. So we'll have to wait and see what's going to come of that one.
So my question to, I guess the four of us, is well, there was this more aggressive behavior from the tax authorities. And I guess in this case, it's really a CRA not necessarily Revenu Quebec. But how does it change the tax environment for taxpayers? How does that impact the resolution of tax disputes? And how do you strike a balance between picking up a fight because you're right, and getting involved in a very lengthy and costly legal battle.
Maybe, Al, I would move-- before we cover all of this, maybe I will ask you to cover-- in Cameco, how did it come about, and what impact did that motion for the interview of those 25 employees, what did it have on the actual conduct of the case?
AL MEGHJI: Well, in summary, we're in the middle of the litigation for the years that we're in court. And this was 2003, that was in court. And the CRA starts auditing the subsequent years. And they say we want to interview 25 people. So we said, well, not sure we're going to let you interview 25 people, because we're in the middle of litigation and we think we've done discoveries.
You've examined us to death on these transactions. And really, nothing has changed. The structure is the same. The contracts are the same. In fact, in the subsequent years, we were dealing with the very same contracts that were in court. It was just picking of more income under the same contracts.
So we said that we're not willing to allow 25 people to be interviewed in the middle of litigation. And it wasn't even 25 people, it was just-- it was frankly a bit over the top. You know they named 25 people who were working in Canada, in Switzerland, and the US. And then they went on to say, and this is not a complete list. We will give you more names as we go across.
So we said, well, we don't really think we're going to play this game. But we decided that-- and this is something that's often lost when people read this case is that the part that doesn't come out, is that Cameco actually made a big effort to try and resolve this.
They said, give us your questions in writing. We'll answer them. Tell us what part of-- we'll tell you what's changed from before. This wasn't-- this case often comes across as what happened in CRA, one in 25 people in Cameco said, go away. We're going to court. That was not what happened here. This was a case where the taxpayer worked really, really, really hard to resolve the dispute with CRA.
And it was our view that that's what should happen, because litigation is expensive. It's time consuming. It causes stress. And unnecessary fights with CRA, It's not a good thing. It's not in anybody's interest. So it was at the end of the day that we said look, we just can't reach an agreement. And then they serve the requirement on us, and we said we're not going to comply with this requirement.
And they went to court and asked for the compliance order. And it went to the Trial Court, where the Trial Court said-- and the reason I think if you read that judgment-- when you read the Trial decision judgment, you see how important it was that Cameco was reasonable. The Trial judge goes out of her way to-- in her motion she said site the thing. She says, Cameco for to do this and Cameco for to do that.
And the judge-- I think the judge saw that this was not a case of an unreasonable taxpayer trying to hide stuff, trying to stop the audit, trying to get in the way of things. This was a taxpayer who was dealing with a $3 billion case in the tax court, and was busy with all of that. And all of these people were going to testify. And they wanted the litigation not to be contaminated, but they were willing to work with the CRA to solve the problem.
And I think that really move the trial judge to say that she's not going to exercise their discretion in order of compliance because of that. And then when it went up to the Court of Appeal you see two sets of reasons and you see justice woods relying on the facts and saying the facts of this case are such that the trial judge the emotions judge exercised their discretion and said I'm going to order it on these facts because it's unreasonable
The majority didn't go down that road the majority said simply under the law the CIA doesn't have the power. So the teaching from chemical and I really want to emphasize this because people get off the teaching from chemical is not to go and knock heads with the CIA every time that's a bad idea.
The teaching from chemical is doing everything you can to resolve it and make sure there's a record of all of the things you're doing to resolve it and then when a fight comes because you know the judge is going to want to do the right thing she's not going to want to stop the CIA from doing their audit the CIA has a right to audit you whether you like it or not. But she also wants to make sure that the CIA is not being heavy handed. And this came across as a CIA being heavy handed
LOUIS TASSE: Marshall.
MARSHALL ROTHSTEIN: I must say that when I looked at the orders or the request by CRA to interview 25 people at the audit stage, it sounded unreasonable to me. And I think that that obviously was unreasonable to the judges at the Trial judge and at the Court of Appeal. And the CIA is going to have to be careful with how aggressive they get. I mean, they can get legislation changed, I suppose, that will authorize this kind of thing. But that was clearly overstepping.
In the Iggillis case, that was the common interest privilege case where a buyer and seller of property got together and wrote a joint opinion to do the transaction in the most tax efficient way. And CRA was after their legal opinion. And the issue was, is there such a thing as common interest privilege in Canada? And the Trial judge his name was Peter Annis. Anybody here related to him? Anybody here a friend of his?
I think it was one of the worst decisions I've ever read my entire life. It was terrible. It was huge. It was lengthy. It was a polemic. It used some obscure stuff from the New York State Judgment and from some teacher, some professor at Southern University about common interests privilege.
It took the Court of Appeal five-- I think the judgment was 18 pages long. Annis' judgment was 100 pages long. It took the Court of Appeal 18 pages. And that was-- the first 10 pages were all about the facts of the Trial judge and all that stuff. The decision was actually about five pages.
And there's obviously-- to me it's quite obvious that there is such a thing as common interest privilege, where two parties are doing a transaction and they have the same interest, which in this case was referred to be a tax efficient transaction I don't know, it seems pretty obvious that that's a common interest sufficient to engage common interest privilege. And so I think that the CRA was really overstepping in that case, trying to get the legal opinions from the parties.
LOUIS TASSE: That's It?
MARSHALL ROTHSTEIN: Yeah.
LOUIS TASSE: OK, unless you want to really see what you think.
MARSHALL ROTHSTEIN: Annis is a very nice guy. He's just about Judge.
LOUIS TASSE: Mark, do you want to chime in? I guess, I just went back to--
MARK BRENDER: Very quickly, like Al said at the outset, Revenu is testing the limits of their powers. So who would have thought once upon a time that you'd be required to produce your due diligence reports? That provides a pretty nice roadmap to Revenu of all the issues that they would not have been thinking about-- trying to get legal opinions, working papers, et cetera. It's all about making the audit as easy as possible and exposing the taxpayers weaknesses.
So this is just a perfect example of how aggressive the CRA is. And when you-- and I agree with Al that the idea is not just to resist the request at the outset, it's to try to work with them, find a middle ground. And we just recently were hit with-- the client was hit with requirements where they'd asked for all emails relating to certain transaction.
And that's pretty unreasonable, people have businesses to run. You're going to run into the CEO and CFOs, and start saying, OK, now, scope through six years of emails from five years ago. That's very disruptive. And you need to sensitize the auditors to that. And generally, I think they can be reasonable, but some are unreasonable.
This request, this requirement that was issued recently as asking for all emails, there's no identification of issues. There's no-- it's not clear to us exactly what the problem is, or exactly what it is, or what the scope of the total audit is. And I would say to you, that's an unreasonable request. That's just an auditor who says, I have the power under Section 31 to issue a requirement. And I'm going to do it. And I'll wait and see what happens.
And so you can see the trend here, and don't expect it to change. But at the same time, find a way to work with the auditor. Find out what issues you're interested in, narrow the request, and then formalize that with a confirmatory letter saying, because they've issued this requirements. Once the requirements are issued and you don't respond to it, you're into a judicial process, potentially in contempt of court, et cetera, et cetera.
LOUIS TASSE: And I guess to your point, Mark, I've seen situations where they're just asking for correspondence emails without necessarily limiting the scope of, I guess what those emails or correspondence we're dealing with. And then you get with just a ridiculous amount of time just to try to retrieve all those. And the reality is there's no way that CRA auditor is going to look at all that.
MARK BRENDER: They're looking for the smoking gun, right?
LOUIS TASSE: Yeah, but for instance, if you have-- I mean, I remember from one of your files that one of your clients was asked for like 3,000 emails. I mean, do you really think that the auditor-- or what is he going to do? He's going to put that in the computer and with a search function is going to be looking for a smoking gun, or how do we-- I just have a very bad word in my-- how do we-- so how we can take advantage of the government?
But in any event, I think it is something that we're going to see more and more often. I certainly agree with Al that It is better to try to be-- to try to solve the issue before it gets too far. If anything, like it happened in that case that you were part of in Cameco, it shows that you have clean hands. And that you try to accommodate CRA, and they are the ones who are being unreasonable.
And I would add that it was the same situation in the BP Canada Energy file, where every time that the auditor had a question that ended up on the path for asking for the working papers, an answer was provided, and whatever issue was dispelled. But she came back for more, and she came back for more. And every time there was an answer.
And at the end of the day, at least when you read the decision from Chief Justice Noel, you get the distinct impression that the CRA auditor, she asked for it because she felt that she had the right to ask for it. She didn't really need it, but she had the right to ask it.
And when you read the decision, time and time again, Noel is saying, so what we have in this case is an auditor insisting on getting access on those working papers for taxation years-- when the taxation years were already assessed. And the issues were already-- I guess the file-- her file was complete. And I think, and I guess, maybe you tell me Al, but I think that that had a big role to play on Chief Justice Noel's decision to reverse, or I guess, to reject CRA's position.
AL MEGHJI: Yeah, that's clearly right. I think that one thing that-- one lesson from BP is I often hear taxpayers say, well, BP is out now and we don't have to provide our taxical or working papers. I don't think that's what BP stands for, BP is a very specific case, dealing with specific facts, and a specific situation. And you need to manage the process.
BP won only because the process was well managed when the demands were made. But there are situations where it doesn't-- there's no blanket rule that the CRA has no right to taxical or working papers. I don't think that's the lesson in BP. It's a very fact specific case.
MARK BRENDER: And just to state the obvious from a practice standpoint, privilege is important. And you can seek to protect your working papers with privilege, or your uncertain positions with privilege, or your due diligence reports with the privilege, properly structured. You can't do it after the fact. And I think this is something that, going forward, that we should all be considering.
LOUIS TASSE: Well, I guess that's the most segue into the next slide. Mark is always a few days ahead of the presentation. I guess one thing that I wanted to mention, the second bullet in the slide. So essentially, what CRA has said after the Cameco decision is that nothing has changed, and we still expect you to answer all the questions that we might have. At least that's my take, I don't know--
AL MEGHJI: What that decision, the Court out of the-- the Court out of the decision. And it's frankly intellectually facile what they're saying here, because, yeah, if the CRA auditor shows up in your premises and says, can you show me where the GL is, yeah, you're supposed to answer that question.
But if the CRA says, I want to interview somebody for 20 hours, OK, the answer to that is no. So what they're doing is they're taking these comments about-- you have to cooperate with the CRA, and give them your books and records, and answer basic questions. And that's always been an obligation. But that's not what taxpayers are fighting about, they're fighting about questions which are overly intrusive. I don't worry too much about that.
LOUIS TASSE: What do you worry about?
AL MEGHJI: Not much anymore.
LOUIS TASSE: I guess, on this slide, we're talking about, OK, so what's going to be the real impact? And maybe, Al, I mean at the firm we have a number of transfer pricing files, are you aware of any specific impact on those audits or the way that those files are being treated?
AL MEGHJI: Well, they ask for interviews. And most of the time they-- and we've got a whole bunch of big transfer pricing audits and cases going forward. And the CRA obviously asks for interviews. And we say, sure, we're happy to work out something with you which is reasonable. So tell us what you want to learn.
And they say we want to interview 10 people that do this. And we go, well, no. That's not a good idea, but tell us what it is that you want to learn? And they say, we want to learn about your business? We want to learn about where the functions are, we want to learn about where the different risks are. We want to learn about what assets are employed.
And I say, OK, it seems to me based on that we're going to put forward three really senior people. One is going to deal with how our operations are organized. The second one will answer your economic questions such as how is the transaction structured and the economics of it. And the third one will explain what kinds of risks take place.
You don't need 20 people, here are three. We'll schedule them back to back. And how about we give you a day each with somebody. And they say, that's not enough, we need 5. And we go, no. We'll give you a day. So what I'm saying is what are we trying to do here? We're not-- I just tell our team put yourself in the position of a judge who is going to hear a subsequent compliance order. And you'll hear the story of what you proposed.
And you want to be in a position where the judge says, taxpayer's being compliant, and reasonable, and helping So and the point is, just to be clear, most of the time it works. Cameco is an aberration. 99.9% of the time, we work it out. And it just goes smoothly. I just think it's about managing the process better.
AUDIENCE: I guess the way you described it is usually the way it is, right? They want to know three things-- I mean, they're happy for you to handle everything. Why wasn't Cameco deescalated administratively? Like, why didn't you just call the person's supervisor and say, look, there's not going to be a 25-person interview. At some point, you usually speak to someone, and they say I agree. This is what we need to know, help us get the information.
AL MEGHJI: We did
AUDIENCE: And you could not speak to someone that--
AL MEGHJI: No, we did. We went quite up. We went quite-- we worked-- the record on it is-- the judge had the full record in front of her about what happened. You know it's very unusual for a judge to write a judgment where she writes in her decision at trial after looking at the record.
The taxpayers come before me with clean hands. She actually says that in her reasons. She didn't just make that up. The record was extremely compelling in terms of the efforts that were made. To use your word, I like your word, deescalation was valiantly attempted.
But if you ask me why I think this happened is because we were in a pitch battle in the tax court on assessment, which was-- or taxes which were in the billions of dollars. And I'm not-- I'm just speculating, in case somebody from CRA is listening. I'm just speculating. I don't know this to be a fact. But some people felt that maybe they were attempting to use the interview process to essentially do a discovery that was already over. That there were holes in their discovery, and there were not sure about things. But the discovery process was over. We were headed to court and--
LOUIS TASSE: How many days the discovery lasted?
AL MEGHJI: How many months is what-- it was months. Anyway, but it was seriously attempted. We did not want to before-- we did not want to be before-- we were too busy with the real issues too. We didn't want to go to court and fight about this, but we were forced to.
AUDIENCE: In your case was something supported, not just by the auditor? And this manager is probably Justice Kennedy that supported that action.
AL MEGHJI: You know what? Obviously, because Justice Kennedy decided to take it to court. And there were-- I think I won't to talk about specifically what happened, because I don't want to comment about the file. But I can say this generally, that if your lawyers do not take the time and sit down with justices just to try and resolve this, then they're not doing their job.
And we were doing our job. So you can infer that there were-- what happened here. I think what happened at the end of the day is, they decided we were going to test this, we're going to test this provision to see if we have this power.
LOUIS TASSE: [INAUDIBLE]
AUDIENCE: I know that sometimes [INAUDIBLE] Justice and sometimes Justice [INAUDIBLE] but we've heard in our case where Justice went back to the auditors, and the auditors were pushing him to go to court. So I mean, to me that reflects the an extent bad faith on the auditors part, I mean CRA's part.
AL MEGHJI: Well, that's an interesting thing. I think the question about-- this always comes up. Who's making these decisions? Who's pushing who around? And it all comes down to the individuals. I mean, I'll say in my own example, when I worked at the Department of Justice and I thought something was the right thing to do, there was no auditor that was going to tell me to do something I didn't want to do. It wasn't going to happen.
I mean the Department of Justice Act says that the administration of justice in litigation is within the purview of the Ministry of Justice, not the CRA. So we often talk about the CRA as being the client of the Department of Justice. Yes it is, it is a practical matter. But if you have a strong determined justice lawyer who believes something is right or wrong, they can get it. They can deal with it.
But often you'll have personalities-- you may have a very strong CRA person, strong senior CRA people, and Department of Justice lawyers who have an agnostic view of the matter. They go, yeah, OK. If the CRA wants to go, we'll go. They don't have a strong view on it. That's not a criticism of them, because contrary to what most people think, there are lots of things that I don't have a strong view on. So sometimes they say if the client really wants to pursue, pursue it. So I think that the dynamic is different for every file.
MARK BRENDER: And where there's an interesting dynamic sometimes, not so much as it can be between justice and audit, but also within audit, between audit and rulings, right? Where audit's pushing a position and someone internal-- and internally, there's some disagreement as to whether that position should be pushed. And ultimately its audit has the authority to push an issue even though internally it's not actually supported.
LOUIS TASSE: So we're actually past 10 to 2. So I'm going to Zoom by some of the slides. Like I said earlier, you will get copies of it, so you'll be able to go back to it. But we do talk about like the practical considerations, like what you need to consider when whether to decide to agree or not with the interviews. And we also summarize with what we can take from the majority decision of the Court of Appeal. And I guess there's an open question that has not been answered by that particular decision.
Now for the uncertain tax position papers, well, I guess Mark alluded to the fact that there is a solution. You could always get those under the umbrella of solicitor client privilege. But obviously, that has to be a legal opinion that is provided. A law firm cannot simply ask the post office.
And as Al mentioned, to me it's clear that we have not heard the last of this. Ted Gallivan, senior CRA official as mentioned time and time again that they were just looking to find the better case to bring back up to the Federal Court Trial Division.
And he actually said at the [INAUDIBLE] conference, I believe it was two years ago. He said, we're going to find a case that we're sure to win, which obviously I'm not sure that exists. But it is a matter that we're going to see. And obviously, as Al mentioned, you have a fact pattern in BP that is very particular.
And you can imagine a situation where the audit is ongoing, where you do have questions that are not answered to the satisfaction of the CRA, what then? What happens? So that remains to be seen. And we've covered the due diligence reports.
AUDIENCE: Have you had any request on clearing in the Montreal area about uncertain tax position or?
LOUIS TASSE: Not me personally, I'm turning to my colleagues, Mark?
MARK BRENDER: No, I haven't seen that particular request. But I think you can expect it. And you can expect due diligence reports and tax opinions to be requested, I'm just assuming.
LOUIS TASSE: So I guess in the next five minutes, we're going to talk about misrepresentation and gross negligence penalty. So one thing that I want to point out is that the French version of the provision that deals with the misrepresentation talks about misrepresentation of fact, whereas the English version does not.
There is some case law dealing with this. And to me it's utterly unsatisfactory, because they don't really address point blank the case. So for instance, if you have a pure disagreement, both parties-- the taxpayer and CRA agree about the facts. But it's just a disagreement about how the law applies, could this be misrepresentation? You do have case law that says that it does. You have other case law that says that, well, if it's just a disagreement about the application of the law, then there is no misrepresentation. So it's something to think about.
That's the test that is applied for misrepresentation. So "Care exercise must be that of a wise and prudent person. And the returns must be filed in a manner that the taxpayer truly believes to be correct." I'm going to skip by the gross negligence penalty, and maybe we can talk about-- and I will ask Mark to maybe give an example in two minutes, or less, of cases that we've seen where those type of arguments have been raised.
MARK BRENDER: Well, as I said at the outset, this is a very fertile ground. Revenu is raising these misrepresentation regularly. So you see on slide 34, we have situation one. Taxpayers relied on professional advice that turns out to be wrong. So the issue here is, there's a position taken in the return Revenu disagrees. Whether that-- we'll assume that that's a misrepresentation because the cases at least seem to suggest that the minute there's some position taken in return, which is incorrect, that's a misrepresentation although there's probably some evolution to be seen in the case with respect to that issue.
And so the question is, if you relied on legal advice or professional advice is that sufficient to take you out of the-- take you out of the provision such that a normal reassessment period applies? And I think the point is we've seen situations where taxpayers have alleged professional advice. And then the question is, do you have to produce that professional advice? And there may be reasons that you don't want to, it's for simply to preserve privilege or other issues.
So I would say to you that be careful in asserting this when you're in the context of litigation, because once you assert it, it could constitute a waiver of privilege. So there are some sensitivities around that. But relying on professional advice should itself be sufficient to provide a defense as long as the professional advice was contemporaneous and reasonable.
Second, situation two, supposed misrepresentation is that the taxpayer did not predict the CRA's legal arguments. I mean, I don't think thinking people can disagree on issues. And you could have a very reasonable position and land-- and end up being ruled to be have taken the wrong position, does that constitute a misrepresentation?
As I said, I think that if you were reasonable in arriving in that position rather than closing your eyes or making your own-- or making your own evaluation of law, I don't think that that's sufficient to get you out of the provision.
Taxpayers made an honest mistake. Honest mistakes, again, if you weren't-- the standard should is whether misrepresentation was due to neglect, carelessness, or willful default. So an honest mistake, an example we're talking about is you've been assessed. You review your tax return. You reflect $10 million of income. Your actual income was $11 million, say. Not identifying that error, which may have been made by the tax preparer for example would seem to be an honest mistake.
But if your income was actually 100 million and you sign off in a tax return and there's 10 million, then obviously you were neglectful. You didn't take reasonable care in reviewing the return. And there's actually recent cases dealing with those very precise examples.
And then when it comes to penalties, it's the same issue, OK, where you have very sophisticated taxpayers who fail to file returns, or have repeated errors. And they come forward and say, look, you know the laws-- these are innocent mistakes. How could I have known? And the courts will look at the background of the individuals.
And one case that comes to mind is the [INAUDIBLE] case where this was a very sophisticated fund manager who was very sophisticated in financial matters. And he argued-- again, he had a very stiff gross negligence penalty assessment against him.
And the court had no sympathy for someone knowledgeable as knowledgeable as him versus the innocent taxpayer who's not sophisticated in tax matters, and who innocently, or is following the blind advice of their tax preparer, who may be unscrupulous, for example, and leads them to make a mistake in their tax return. In those cases, they may both be able-- the taxpayer can avoid the opening of-- the extension of the reassessment period and penalties. And with that I'll stop.
LOUIS TASSE: Yeah, Mark, time to say goodbye.
MARK BRENDER: So I'm going to say goodbye to everybody, and ask you because it's important that we understand what we did right and what we did wrong. So firstly, thank you everyone who's attended in person. We appreciate you participating in these-- and expressing your interest in these continuing professional development events. We hope that you found this informative and enjoyable, hopefully practical, and will take home value.
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