http://decision.tcc-cci.gc.ca/en/2013/2013tcc231/2013tcc231.html 
Burlington Resources Finance Company v. The Queen[1] is a decision on a motion by the appellant to strike an Amended Reply filed by the Minister. The factual background is not particularly complex but obviously involves a great deal of money:
[5] The appellant is [a Nova Scotis unlimited liability company] resident in Canada. [Burlington Resources Inc.], its US parent, owns 100% of its shares, along with the shares of several other corporations in Canada (the “Sister Corporations”).
[6] During 2001 and 2002, the appellant issued the Notes to arm’s length parties, raising approximately US $3 billion. As a result, the appellant incurred two types of costs. During its 2001 taxation year, the appellant incurred the Financing Costs, which included underwriter’s fees, legal and accounting fees, and fees payable to the Securities and Exchange Commission. During its 2002 to 2005 taxation years, the appellant incurred the Guarantee Fees. According to the appellant, it incurred the Guarantee Fees in exchange for BRI’s full and unconditional guarantee of the principal and any premium and interest on each of the Notes.
[7] The appellant, BRI and the Sister Corporations also issued inter-company promissory notes and entered into forward purchase agreements and swap agreements (the “Hybrid Instruments”) whereby the appellant loaned the proceeds of the Notes to the Sister Corporations. According to the respondent, the Hybrid Instruments ensured that the appellant would be able to make payments due under the Notes. The Sister Corporations used the proceeds for general corporation purposes, including repaying existing debts and facilitating acquisitions of oil and gas assets.
[8] In calculating its taxable income for its 2002 to 2005 taxation years, the appellant deducted the Guarantee Fees and the Financing Costs as follows: pursuant to section 9 of the Income Tax Act (the “ITA”), the appellant deducted the annual Guarantee Fees payable to BRI in each of those taxation years, the total annual deductions claimed for Guarantee Fees being $23,156,153 for 2002, $21,952,025 for 2003, $19,590,771 for 2004, and $18,118,688 for 2005; and pursuant to paragraph 20(1)(e) of the ITA, the appellant deducted 20% of the total Financing Costs for each of those taxation years.
[9] In 2011, the Minister reassessed the appellant, denying those deductions and levying transfer pricing penalties against the appellant.
[10] In denying the deductions for the Guarantee Fees, the Minister relied on paragraphs 247(2)(a) and (c) of the ITA, claiming that the terms or conditions of the arrangement between the appellant and BRI in respect of the Guarantee Fees were not terms or conditions that would have existed between arm’s length parties. The respondent also invokes paragraphs 247(b) and (d) of the ITA in her reply, arguing that the series of transactions giving rise to the Guarantee Fees would not have been entered into between arm’s length persons and can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit.
[11] In denying the deductions for the Financing Costs, the Minister relied on section 67 and paragraph 18(1)(a) of the ITA, maintaining that the expenses deducted were not reasonable and were not incurred for the purpose of earning income from the appellant’s business.
The appellant was successful in having the Amended Reply Struck while the Minister was given leave to file a further Amended Reply within 60 days:
[3] On April 30, 2013, each party brought a motion. The respondent seeks permission to file an amended reply (the “Amended Reply”). The appellant asks this Court to strike the Amended Reply or, in the alternative, to order the respondent to provide additional particulars.
[4] For the reasons that follow, the respondent’s motion for permission to file the Amended Reply is allowed. The appellant’s motion to strike the Amended Reply is also allowed. However, the respondent is granted leave to file, within 60 days of this order, a further amended reply within 60 days of this order, addressing the deficiencies discussed below. The appellant may serve and file an answer within 60 days of the respondent’s serving and filing a further amended reply. Costs shall be in the cause.
While the arguments raised by both the appellant and the Minister were complex and lengthy, the appellant’s success arose from what might be described as a tactical blunder on the part of the Minister. In the Amended Reply the Minister chose to not acknowledge the existence of the Guarantee but rather attacked the “terms or conditions” of the Guarantee Fees. This was apparently based on the logic that since according to the Minister no guarantee would be obtained by a taxpayer in an arm’s length situation, it would somehow undermine the Minister’s case to admit the existence of the Guarantee in the Amended Reply:
[27] In its submissions, the appellant clearly identified numerous drafting deficiencies in the Amended Reply. Because of these deficiencies, the respondent has failed to adequately frame its case with regard to how paragraphs 247(2)(a) and (c) serve as a proper basis for the reassessments.
[28] In paragraph 11(b) of her Amended Reply, the respondent says that the issue to be decided in this appeal with respect to paragraphs 247(2)(a) and (c) is “whether the terms or conditions made or imposed in respect of the Charges” which the respondent defines at paragraph 4 of the Amended Reply as the Guarantee Fees payable by the appellant to BRI “differed from those that would have been made between persons dealing at arm’s length.”
[29] That formulation is manifestly incorrect. The correct question under paragraphs 247(2)(a) and (c) is whether the terms or conditions imposed in respect of the guarantee itself, not the terms or conditions of the guarantee fees, differed from those that would have been set between persons dealing at arm’s length. I do not see how the respondent can rely on paragraphs 247(2)(a) and (c) to challenge the terms or conditions regarding the amounts paid by the appellant for the guarantee. Rather, if I understand the respondent’s position, the terms or conditions she challenges under paragraphs 247(2)(a) and (c) are the amounts of the fees themselves.
[30] In my opinion, phrases such as “the consideration for the guarantee fee” or “the price of the guarantee fee” are unclear. If the respondent relies on paragraphs 247(2)(a) and (c) to challenge the amounts of the fees paid by the appellant, the issue is the price of the guarantee, not the price of or consideration for the guarantee fees. Further, without acknowledging the existence of a guarantee, how can one challenge the price of that guarantee? The respondent should clarify this.
[31] At the hearing, I asked the respondent’s counsel why the respondent chose to ignore the existence of the guarantee in the Amended Reply. Counsel suggested that it was done in order to avoid compromising the respondent’s theory that an arm’s length person would have refused to enter into the guarantee arrangement.
[32] I see no harm in acknowledging that the appellant contracted for a guarantee from BRI. Doing so does not conflict with the respondent’s argument under paragraphs 247(2)(a) and (c) or 247(2)(b) and (d) that an arm’s length person would not have entered into the same agreement if placed in the circumstances of the parties. Nor does acknowledging the existence of the guarantee conflict with the respondent’s contention that the appellant can reasonably be considered not to have entered into the transactions at issue primarily for bona fide purposes other than to obtain a tax benefit.
The Minister’s pleading was also hampered by a very opaque pleading as to which provisions of the Notice of Appeal the Minister was denying:
[33] The appellant also takes issue with paragraph 7 of the Amended Reply, which states: “With respect to paragraph 17 of the Notice of Appeal, [the respondent] denies the facts alleged to the extent that they are inconsistent with the Minister’s assumptions of fact as set out herein.” Paragraph 17 of the Notice of Appeal refers to certain assumptions made by the Minister regarding the credit ratings of the appellant and BRI, and regarding the necessity of BRI’s guarantee of the Notes.
[34] In my opinion, the respondent’s response in paragraph 7 of the Amended Reply is improper because it does not clearly admit, deny or claim no knowledge of the facts in paragraph 17 of the Notice of Appeal. By denying certain facts “to the extent that they are inconsistent with the Minister’s assumptions” in the Amended Reply, the respondent invites unnecessary debate as to which facts in the Amended Reply are “inconsistent” with the facts in paragraph 17 of the Notice of Appeal. Two parties opposed in interest could disagree as to whether certain assumptions are inconsistent. The respondent must take a clear position on these facts.
The appellant’s three other arguments[2] were unsuccessful because they did not meet the “plain and obvious” test for striking pleadings.
Comment: Cases of this sort are not particularly common in the Tax Court and tend to occur most frequently in situations involving large dollar numbers. The court’s decision in this instance seems a welcome exercise of its discretion. Taxpayer should know the case they have to meet and should not be forced by the Minister’s Reply to chase phantoms. The Crown’s refusal to acknowledge the existence of the Guarantee appears to have been an example of getting too caught up in tactics and losing sight of the real issues. Similarly the Minister’s refusal to clearly set out the aspects of the Reply which he denied was simply unfair to the taxpayer. One hopes this decision bodes well for a resurgence of clear and straight forward pleading on the part of the Minister in future.
[1] 2013 TCC 231.
[2] 1. Inconsistent assumptions;
2. The guarantee was unnecessary since the appellant was an unlimited liability company the debts of which were implicitly guaranteed by BRI; and
3. The pleading of incomplete assumptions.