http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/223978/index.do
Canadian Forest Navigation Co. Ltd. (February 23, 2017 – 2017 FCA 39, Gauthier, Stratas, Boivin (author), JJ. A.).
Précis: The appellant received payments in 2004, 2005 and 2006 from its foreign affiliates. The payments were described as dividends. Subsequently the appellant obtained rectification orders in Cyprus and Barbados declaring such payments not to be dividends but rather transfers that resulted in indebtedness by the appellant to the foreign affiliates in the amount of the transfers. The appellant applied for an order under section 58 of the Tax Court of Canada Rules (General Procedure) that a question of law be determined before the hearing:
Is the Minister required to not treat the transfers as dividends, or to not take the position that the transfers are dividends in this Appeal, by virtue of the foreign rectification orders, but rather to treat the transfers as resulting in indebtedness by the Appellant to the foreign affiliates in the amount of the transfers?
The Tax Court concluded (the decision was blogged earlier on this site):
that the respondent is not bound by the foreign judgments since they have not been recognized in Canada by a court of competent jurisdiction, and therefore the respondent is not precluded from taking the position at trial that the appellant received dividends, rather than amounts in the form of loans and other indebtedness, during the period at issue.
The taxpayer appealed to the Federal Court of Appeal which concluded that the Tax Court had erred in answering the question posed:
[21] Therefore, it does not appear as though the answer given by the Associate Chief Justice to the question pursuant to Rule 58 of the TCC Rules will resolve anything in the context of the underlying appeal. Instead, the answer can best be provided by the Tax Court judge. On the basis of all the evidence adduced by the parties, the Associate Chief Justice should not have answered the question.
[22] For these reasons, I would allow the appeal, set aside the judgment of the TCC and decline to answer the question under Rule 58. I would also dismiss the Rule 58 motion before the TCC.
The parties were to bear their own costs both in the Court of Appeal and in the Tax Court.
Decision: The Court of Appeal concluded that the effect of the foreign court orders was a question of fact to be put before the Tax Court in a trial:
[14] Essentially, the appellant argues that pursuant to article 2822 C.c.Q.: (i) foreign judgments are facts that cannot be disregarded; and (ii) foreign judgments have direct effects that the Minister cannot ignore in assessing CFN.
[15] On the first point, I agree with the appellant that foreign judgments must be taken as facts, even in the absence of homologation. Indeed, pursuant to article 2822 C.c.Q. “[a]n act purporting to be issued by a competent foreign public officer makes proof of its content against all persons …”. As such, factual findings contained within those judgments are facts that cannot be disregarded by a Court.
[16] The appellant’s submission is also supported by the author Henri Kélada. In Reconnaissance et exécution des jugements étrangers (Cowansville: Éditions Yvon Blais, 2013) at p. 37, Mr. Kélada clearly states that foreign judgments are facts that Quebec Courts cannot ignore:
[Unofficial translation]
A foreign decision constitutes a fact whose effects cannot be ignored by Quebec courts, even in the absence of an enforcement order.
As an instrument, a foreign judgment can also be used as evidence (art. 2822 C.C.Q.). A Quebec judge will be required to consider the fact that the foreign judgment has been rendered.
[17] Hence, both orders from Barbados and Cyprus are proof that the corporate resolutions have been rectified to authorize the dividend payments and to transform them into indebtedness, no more, no less.
[18] Moreover, since these foreign orders involve the appellant and its Foreign Affiliates and not the Minister, a third-party to the foreign proceedings, there is nothing to enforce against the Minister; homologation is therefore a non-issue. It follows that on the basis of the record, I cannot endorse the Associate Chief Justice’s reasoning on homologation as it was not pertinent to decide this matter.
[19] However, I cannot agree with the appellant on the second point, namely that pursuant to article 2822 C.c.Q. these foreign orders are dispositive and that the Minister has no choice under the ITA but to accept the dividends are actually loans because the orders from Barbados and Cyprus say so.
[20] In the end, what remains to be determined is the foreign orders’ effect vis-à-vis the Minister. The answer will necessarily depend on the evidence adduced by the parties, and the weight ascribed to the foreign orders as facts pursuant to article 2822 C.c.Q. These determinations are for the Tax Court judge to make, with a full evidentiary record at his or her disposal.
The parties were to bear their own costs both in the Court of Appeal and in the Tax Court.
Comment: In essence the taxpayer was pursuing a “magic bullet” intended to knock out the Minister’s assessments without the necessity for a trial; instead of a magic bullet the Court of Appeal found the taxpayer was pursuing a chimera.