Cameco Corporation v. The Queen (December 2, 2014 – 2014 TCC 367) is an unusual example of procedural trench warfare which apparently blew up on counsel for the taxpayer. After the conclusion of discoveries the taxpayer moved for somewhat extraordinary relief:
[1] The Appellant has brought a motion for:
1. An Order striking paragraphs 31(a), 36, 37 and 38 (the “Paragraph 247(2)(a) Statements”) of the Amended Reply filed by the Respondent on February 15, 2011 and directing that the Respondent is precluded from disputing that the terms and conditions of all of the transactions between the Appellant and any of its affiliates, which are in issue in this appeal, are terms and conditions which would have been made between persons dealing at arm’s length;
2. An Order directing the Respondent to provide answers (and to also answer any proper questions arising from those answers) to questions 1118-1123 of the examination for discovery of Mr. G.H. conducted on February 5, 2014 (concerning the Crown’s Sham Theory);
3. Costs of this motion, payable in any event of the cause; and
4. Such further and other relief as counsel may advise and this Honourable Court deems just.
The provisions sought to be struck were as follows:
C. ISSUES TO BE DECIDED
31. The issues to be determined in respect of transactions or series of transactions or arrangements described in paragraphs 14 and 17 are:
a) whether the provisions of paragraphs 247(2)(a) and (c) apply to the said transactions; …
D. STATUTORY PROVISIONS, GROUNDS RELIED ON, AND RELIEF SOUGHT
36. He respectfully submits that the terms or conditions made or imposed in respect of the sale and purchase of uranium between Canco [the Appellant] and Swissco and the services to be provided by Canco to Swissco in respect of the Mining Agreements differed from those that would have been made between persons dealing at arm’s length within the meaning of paragraph 247(2)(a) of the Income Tax Act. Canco performed all the functions and undertook all the risks and Swissco undertook no functions and assumed no risks. Arm’s length parties, in such circumstances, would give Swissco negligible or nil consideration and provide Canco with all the income, commensurate with each parties’ functions and risks in the transactions. The Minister properly reassessed as such by adding all of Swissco’s profits into Canco’s income pursuant to paragraph 247(2)(c) of the Income Tax Act.
37. He further submits that with respect to Tenex, Urenco and other transactions with third parties whereby Swissco executed contract(s) and /or amendment(s) or had them assigned to it by Luxco, Canaco guaranteed the performance and payment by Swissco for a guarantee fee, created a Service Agreement whereby Canco performed all substantive functions and all necessary functions, and undertook all the risks. The terms or conditions between Canco and Swissco in respect of those transactions differ from those that would have been made between persons dealing at arm’s length within the meaning of paragraph 247(2)(a) of the Income Tax Act. At arm’s length, the terms and conditions would:
a) reflect compensation to Swissco only in respect of the functions and risks it undertook, which were limiting to executing contracts and maintaining Swissco as a legal entity; and
b) the party undertaking all the remaining functions and assuming all the risks would earn all the profits, either through the Guarantee Agreements and the Service Agreement or other arrangements.
38. Pursuant to paragraph 247(2)(c), the Minister properly reassessed in accordance with the terms and conditions that would exist between arm’s length parties, namely all the profit would be earned by Canco and Swissco would not earn any profit.
The motion had its roots in two earlier motions decided by Rip CJ in 2010 and 2011:
[6] By way of background, the Appellant brought a motion to strike certain paragraphs of the Respondent’s original Reply on May 17, 2010, which, inter alia included the following paragraphs found in the assumptions portion of the Reply, namely subparagraphs 14(bbb) and (fff) which read as follows:
(bbb) the transfer prices for uranium on the sales by Canco to Swissco and the purchases by Canco from Swissco were not consistent with an arm’s length price;
(fff) the terms and conditions made or imposed in respect of the sale and purchase of uranium between Canco and Swissco differ from those that would have been made between persons dealing at arm’s length.
[7] Chief Justice Rip struck both of these provisions in his Order of December 30, 2010 with leave to amend for the reasons stated in paragraphs 48 and 49 of his Amended Reasons for Order dated January 12, 2011 which read:
[48] Subject Paragraph 14(bbb) is another key allegation in this appeal alleging that the transfer prices on the sales and purchases in issue were not consistent with an arm’s length price. The Appellant is entitled to know what prices are consistent with an arm’s length prices to the extent that such prices cannot be determined by reference to the amount of tax assessed. This paragraph will be struck with leave to amend.
[49] Subject Paragraphs 14(fff), (ggg) and (jjj) will be struck with leave to amend. The contents of these paragraphs are mixed fact and conclusions of law, in particular a paraphrase of paragraph 247(2)(a) of the Act.
[8] With leave to amend, the Respondent filed the Amended Reply where such provisions were contained in identical form save that they were referenced as subparagraphs 14(eee) and (lll). Consequently, the Appellant brought another motion to strike these two subparagraphs on the basis the Respondent did not comply with Chief Justice Rip’s First Order to strike the identical subparagraphs pursuant to Rule 53. Chief Justice Rip ordered the provisions struck in his Order of July 20, 2011 (the “Second Order”) for failure to comply with the First Order on the basis same offended Section 53 of the Rules. Notwithstanding that Chief Justice Rip incorrectly identified those subparagraphs as 14(bbb) and (fff) instead of (eee) and (lll) there is no dispute what provisions he was referring to. In paragraph 20 of his Reasons, Chief Justice Rip reiterated his rationale for striking it in first instance:
[20] Subparagrpah 14(bbb) was ordered struck from the reply because the appellant was entitled to know how the prices for uranium transferred between Canco and Swissco differed from those that would have been agreed upon by arm’s length parties. …once the Minister assumed that the transfer prices for uranium contracts differed from those that would have been made between persons dealing at arm’s length, the appellant was entitled to know exactly how they differed. In principle, this may apply to subparagraph 14(fff) of the reply as well.
[9] In paragraphs 22 to 23 Chief Justice Rip went on to state that in effect merely changing the numbers of the subparagraphs does not constitute an amendment and thus if no amendment was made the provisions were ordered struck. In paragraph 23 Chief Justice Rip stated:
[23] When a court orders a provision of a pleading to be struck the provision in question must be struck. If leave to amend is granted, the struck provisions may be replaced by amendment. In principle, leave to amend does not anticipate the struck provisions will remain in the pleadings even if, on amendment, further provisions are inserted to clarify or address the concerns of the Court in the first place. …
[10] The Appellant argues that in effect the information directed to be included by Chief Justice Rip in those two subparagraphs; namely that the Appellant was entitled to know how the prices for uranium transferred between Canco and Swissco differed from those that would have been agreed upon by arm’s length parties and once assumed the difference, the appellant was entitled to know exactly how they differed must also be contained in the Paragraph 247(2)(a) Statements or provided on discovery and failure to do so should constitute non-compliance with his Orders and thus an abuse of process under Rule 53(1)(c).
The Tax Court rejected the Appellant’s argument that the earlier decisions of Rip CJ extended to the impugned Paragraph 247(2)(a) Statements:
[17] In my view, the Appellant has not demonstrated the Respondent’s position has no hope of succeeding and it seems clear to me that if a trial judge accepts on the evidence that the Appellant has not demolished the Ministers assumptions, like paragraph 14(x), that assumes all substantive functions relating to Swissco’s alleged business were performed by Canco or paragraphs 14(y) and (rr) which assumes Swissco assumed no risk while Canco did, or (hhh) which assumes Swissco provides no functions of value to Canco and assumes no risk, or (mmm) which assumes Swissco would not earn any profit at arm’s length for failure to perform any functions of value to generally name and summarize a few, then such assumptions can support the Paragraph 247(2)(a) Statements that Swissco is in effect entitled to no or nil consideration in the transfer pricing regime.
[18] It should also be noted that Chief Justice Rip made it clear in paragraph 22 of his Second Order that “… discussions regarding transfer pricing methodologies are not before me at this stage…”. Clearly Chief Justice Rip was not basing his decision to strike the two specific paragraphs on the merits of the Respondent’s profit split methodology and the process it argued in support of its position during those motions.
[19] It follows then that I disagree with the Appellant’s argument that the decisions of Chief Justice Rip would have had to be appealed for the Respondent to maintain the Paragraph 247(2)(a) Statements in its Amended Reply.
[20] The Appellant’s motion to strike the Paragraph 247(2)(a) Statements is denied.
Similarly the Tax Court rejected the Appellant’s argument that the Crown could not lead evidence on this line of argument:
[26] The answer for all the related questions above was as follows:
The Crown’s primary position is in this appeal is that the structure is a sham. In the alternative, our position is that at arm’s length, CEL, [also earlier described as Swissco] would not have been a party to these transactions as CEL did not perform any functions nor did it assume any risks. An arm’s length party would not have entered into these series of transactions with CEL in these economic circumstances. An arm’s length party would not have paid anything to CEL as CEL did not contribute anything of value to the series of transactions. At arm’s length, CCO [the Appellant] would be a party to all transactions where CEL (or CSA) were signatories and CEL’s compensation, if any, would be commensurate with the minimal functions it performed.
[27] In addition to the clear arguments of sham enunciated by such answer, the Respondent also clearly addressed the issue of price in all the transactions by clearly advising that “an arm’s length party would not have paid anything” based on its contribution. The Question is answered and the answer, like in the Paragraph 247(2)(a) Statements the Appellant sought to have struck, is nil. The answer not only addresses sham but clearly addresses the price term of the transactions challenged as being the different term and sets out what an arm’s length party would pay. In the circumstances the Respondent appears to have directly addressed the issues contemplated by paragraphs 247(2)(a) and (c) and appears consistent with the pleadings sought to be struck. Even if I had found Chief Justice Rip’s directive had applied, I would find it was satisfied by such answer. It will be up to the trial judge to ultimately decide whether those sections apply on the evidence but the responses to the questions demonstrate a possible basis upon which the Crown could successfully advance an argument under those provisions. It follows that in my opinion the Respondent has in no way abandoned any argument on these transfer pricing provisions.
…
[30] In this matter I have found no violation of any Rule or Order here as earlier stated and find the questions were answered on discovery. Moreover, the Appellant seeks this severe remedy without having even asked any follow-up questions or requested further details, without having brought any motion to determine whether his question was proper or properly answered or refused as he alleges or otherwise under the Rules, yet seeks this drastic remedy. The Appellant has made no attempt to pursue less drastic steps under the Rules.
[31] Accordingly, I am denying the Appellant’s motion for an Order directing that the Respondent be precluded from disputing that the terms and conditions of all of the transactions between the Appellant and any of its affiliates, which are in issue in this appeal, are terms and conditions which would have been made between persons dealing at arm’s length. The Respondent shall not be precluded from advancing any such position or arguments.
Finally, the Tax Court dealt with the Appellant’s motion to direct that the Crown’s discovery witness answer certain disputed questions:
[33] The questions and the written answers given to those questions, after the Respondent initially took them under advisement at the discovery, are as follows:
26. On the examination for discovery of Crown’s nominee, counsel for Cameco put the following questions:
1118 Q. I would like you, then, to identify for me each instance where the actual legal relationships between [Cameco] and [CSA] in respect of any contract or transaction which you consider relevant, differ from the legal relationships reflected in the agreements between [Cameco] and [CSA].
…
1119 Q. And I will have the same question and I assume get the same response with respect to – – well, let me just put it on the record to it’s there. I’d ask you to identify each instance where the actual legal relationships between [Cameco] and [CEL] in respect of any contract or transaction which it considered relevant, differs from the legal relationships reflected in agreements between [Cameco] and [CEL].
…
1120 Q. I would like the same information with respect to any agreements between any other pair of Cameco entities or any number of Cameco entities.
In other words, I’ve covered off [Cameco] and [CSA] relationships, [Cameco] and [CEL] relationships. If there are relationships or contracts which you say are relevant between any other grouping of Cameco entities, which you say do not reflect the actual legal relationships between them, again I’d like to know.
…
1121 Q. And the same request with respect to the relationship between any Cameco entity and any third party.
…
1122 Q. And I think this will flow from the answers to the undertakings and I would be entitled to ask it, but to the extent your response is that in any of these relationships, the actual legal relationships differed from those represented by the written agreements. I’d like to know the basis upon which you say that. That is to say the basis upon which you say the parties, in fact, were not and did not intend to be governed by the written agreements between them.
MS. CHASSON: Do I understand you correctly that is – that that question is a similar question that you’ve asked previously in other areas, looking for evidence in the nature of documents or otherwise?
BY MR. STEINER:
1123 Q. It would involve, in the first instance, an explanation, and in the second instance, information and documents.
Crown counsel took all of these questions under advisement. (The reference by Cameco’s counsel to “undertakings” in question 1122 was in error.)
27. The following answers were provided in the Crown’s Responses:
1118: All of them because they are all shams. CCO treated CEL’s business as its own.
1119: All of them because they are all shams. CCO treated CEL’s business as its own.
1120: Any contract where CEL or CSA is the named party does not reflect the legal relationship.
1121-1123: Refusal. Too broad. The respondent does not have knowledge all of CCO’s contracts with third parties.
The Tax Court rejected this request as well:
[40] Moreover, these answers must be put in context with the answer earlier discussed given in relation to Question 1117 where the Respondent answered that the “Crown’s primary position is in this appeal that the structure is a sham” and in the alternative goes on to discuss that CEL would not have been a party to these transactions as it did not perform any functions nor assume any risks and the Appellant would be a party to all the transactions. The fact the alternative arguments may support a transfer pricing argument do not preclude them from also supporting a “sham” argument and the trial judge must decide that issue based on the evidence before him. It seems clear to me that the Appellant knows exactly the case it has to meet with a sham theory.
…
[42] With the questions at hand the deponent was essentially being asked to recall all the contracts between the Appellant and CEL and other members of the group as well as between any member of the group and third parties and then identify differences in the legal relationships. These are not only compound questions, especially difficult having regard to the evidence that the various documents in question were complex and different from one another, but also require, as the Respondent has argued, that the deponent would have to segregate all the potential documents in issue, including some with third parties it may not even have knowledge of in Question 1121, and then identify those documents which related to a particular issue, something found improper in Kossow v Her Majesty the Queen, 2008 TCC 422, 2008 DTC 4408, at paragraph 60. The Appellant is aware of which documents the entities entered into and their terms and has the ability to both identify and pose specific questions related thereto.
[43] In summary, I do not find that the questions were not answered and find that the questions were in fact not proper questions and hence will not order the deponent to re-attend to answer those questions as posed.
In one of the most unusual aspects of this very pithy decision the Tax Court ordered costs against the Appellant on a solicitor-client basis in any event of the cause:
[44] The Appellant has not satisfied me that it is entitled to an Order with respect to any of the relief requested in the motion. Frankly, I am of the view the Appellant had no reasonable grounds to justify seeking the relief sought and frankly failed to take proper steps under the Rules to first seek less dramatic relief than that sought as referred to early in these reasons. The Court should not tolerate unnecessary motions that serve only to delay the process at substantial cost to all parties, particularly when the party bringing the said motion is the one alleging abuse of process. The Appellant’s motion is dismissed in its entirety and the Respondent shall be entitled to costs on a solicitor and its own client basis with respect hereto, payable in any event of the cause.
Comment: Justice Pizzitelli was clearly not amused by Cameco’s motion. The award of solicitor-client costs against a taxpayer in any event of the cause may be unprecedented in the Tax Court. A search of the Tax Court database and the CanLII Tax Court database does not appear to disclose any similar award (although it is possible that there might have been such an award prior to 1999).