http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/126925/index.do#_Toc433378115
Canadian Imperial Bank of Commerce v. The Queen (December 2, 2015 – 2015 TCC 280, Rossiter C.J.).
Précis: This is an extremely lengthy (364 paragraphs) and complex interlocutory procedural decision arising out of discovery proceedings. The background to the case is CIBC’s claim to deduct roughly $3,000,000,000 paid to settle claims arising out of the collapse of Enron. The Court examined dozens of questions which CIBC declined to answer for various reasons including a number of allegations of privilege. Ultimately CIBC lost on most of the points at issue and the Court found that they were largely engaged in obstruction of the discovery process. Submissions on costs are to be made at a later date.
Decision: The background:
[2] The appeals relate to CIBC’s attempt to deduct about $3 billion in settlement payments, interest on the payments and related legal expenses (the “Settlement Amounts”) from its business income in its 2005 and 2006 taxation years. The Settlement Amounts relate to litigation arising from certain CIBC transactions with Enron Corp. (“Enron”). After Enron filed for Chapter 11 Bankruptcy protection, CIBC and others were sued for allegedly improperly participating in transactions with Enron involving the sales of assets to special purpose entities. The plaintiffs in the litigation alleged that CIBC knew the sales were improperly represented on Enron’s financial statements. The two Enron‑related litigations in issue are known as the Newby Litigation and the MegaClaim Litigation.
[3] During its 2005 taxation year ended October 31, 2005, CIBC reached a settlement in the Newby and MegaClaim Litigations for approximately U.S. $2.6 billion, or about CDN $2.9 billion. CIBC also owed interest on the Newby settlement payments totalling about $48 million and incurred related legal expenses of about $56 million.
[4] CIBC then deducted almost all of the Settlement Amounts from its business income in its 2005 tax year. In its 2006 tax year, it then deducted from its business income the remaining available Settlement Amounts (which at this point only consisted of interest and legal expenses), totalling about $26.5 million. The 2005 deductions also led CIBC to incur a non-capital loss of $2.1 billion in 2005, leading CIBC to carry back about $2.04 billion of that loss to its 2003 taxation year and $41 million of that loss to its 2002 taxation year.
[5] The Minister of National Revenue (the “Minister”) denied the deductions for various reasons, stating they were offside with s. 3, s. 9 and paragraph 18(1)(a) of the Income Tax Act (the “Act”) as they were not incurred to earn and produce income from business and did not conform to well-accepted business or accounting principles. The Minister says that the costs truly belonged to certain of CIBC’s subsidiaries and affiliates, not CIBC itself. The Minister also denied the deductions under additional heads of the Act, stating that:
• If the Settlement Amounts were indeed incurred to earn and produce income, they were only capital outlays under paragraph 18(1)(b) of the Act;
• The Settlement Amounts would have been reimbursed to CIBC if CIBC were dealing at arm’s length with its subsidiaries and affiliates, and therefore the deductions are offside with ss. 247(2)-(3) of the Act;
• The deductions were not reasonable and therefore violate s. 67 of the Act; and
• The settlement and interest costs were merely contingent liabilities in 2005 and therefore not deductible because of paragraph 18(1)(a) and paragraph 18(1)(e) of the Act.
[6] The Minister also assessed CIBC for instalment interest, arrears interest and overpaid refund interest, and added amounts to CIBC’s taxable capital for the purposes of Parts I.3 and VI of the Act, which added to CIBC’s tax payable. The entire outcome of all four appeals essentially turns on whether CIBC can deduct the Settlement Amounts as expenses.
This decision is as thorough a review of the law relating to issues of privilege and production during the discovery process as one is likely to find in the tax literature. Most of the points are quite esoteric and of little interest except to litigation specialists so I will not attempt to reproduce them. The main takeaway however is the Court’s unvarnished castigation of CIBC for obstructionism:
[362] I have dealt with each specific question and document in issue. I would like to add one final point. In recent times the Tax Court of Canada has had numerous motions similar to this motion. The litigating parties to some extent do not appear to understand what discovery is about. I invite them to examine my comments on discovery made earlier in this decision at paragraphs [270] and [271]. This particular motion seems in large part to be the result of obstruction by CIBC when it comes to the discovery process. Discovery is about allowing both sides to fully prepare for trial and identify all relevant facts and issues. Full and open discovery promotes settlement and proper and efficient trials. Discovery is not about curtailing information production – it is about production of relevant information.
[363] The parties would be better served if they forged ahead and engaged in proper discovery, which would allow them to truly arrive at the facts and issues that are relevant to these appeals. I for one do not believe that obstruction is the proper way to litigate, and there are certainly consequences to that strategy that the Court should and will consider.
Costs are to be spoken to at a date yet to be fixed.