http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/109841/index.do 
Superior Plus Corp. v. The Queen (May 22, 2015 – 2015 TCC 132, Hogan J.).
Précis: This is an example of procedural sparring in a large GAAR case where the taxpayer clearly emerged the victor at least in the initial stages in the Tax Court. The underlying transaction was the conversion of an income trust to a corporation, a conversion that was facilitated by amendments to the
Income Tax Act several years ago:
[2] In late 2006, the Minister of Finance announced a new distribution tax for specified investment flow through entities (“SIFTs”) to curtail the benefits afforded by their conduit tax status. This legislative change encouraged SIFTs to restructure their businesses (commonly known as a “conversion”) by December 31, 2010 by putting in place a non flow through corporate structure, failing which they would be subject to the new tax (the “SIFT Tax”).
[3] To facilitate conversions, the Department of Finance, in July 2008, introduced legislation allowing for tax-deferred conversion methods (commonly known as the “Exchange Method” and the “Distribution Method”).
[4] In general terms, under the Exchange Method unit holders are invited to exchange their units of a SIFT for shares of a single class of shares of a taxable Canadian corporation. This exchange is allowed to occur on a tax-deferred basis. Once the corporation acquires all of the units of the SIFT, the SIFT can then be wound up on a tax-free basis.
[5] In contrast, under the Distribution Method, the SIFT’s business is first restructured as or under a corporation. The SIFT is then wound up on a tax-free basis. The unit holders are afforded a tax-free rollover if they surrender their units for a single class of shares of the corporation.
[6] These measures sparked a large number of conversions, most of which were scheduled to be completed immediately prior to the coming into force of the SIFT Tax. Bucking the trend, the Fund chose to convert earlier, allegedly in order to establish itself as a dividend paying corporation before many of the other SIFTs.
[7] The Fund converted using the Distribution Method. The motion record shows that it did not use a new corporation to complete its conversion. Instead, the Fund entered into a complex plan of arrangement with Ballard Power Systems Inc. (“Old Ballard”, now the Appellant) under which:
(a) the net assets of Old Ballard were transferred to a new corporation (“New Ballard”) that then carried on Old Ballard’s business;
(b) Old Ballard was left with its tax attributes consisting, inter alia, of non capital losses, capital losses, research and development expenses and investment tax credits (the “Tax Attributes”);
(c) the existing shareholders of Old Ballard became shareholders of New Ballard;
(d) the Fund restructured its gas distribution business under Old Ballard;
(e) the unit holders of the Fund became shareholders of Old Ballard; and
(f) Old Ballard changed its name to Superior Plus Corp., the Appellant.
While nothing in the rules governing the Distribution Method precluded the use of an existing corporation or blocked tax advantages achieved by the use of an existing corporation this procedure clearly did not sit well with CRA. It assessed Superior Plus to deny the benefit of the Tax Attributes:
[8] The Appellant used the Tax Attributes to shelter profits earned in its gas distribution business for its 2009 and 2010 taxation years. The Minister of National Revenue (the “Minister”) disallowed the use of the Tax Attributes on the grounds that either:
(a) the unit holders constituted a group of persons who acquired control of the Appellant under the plan of arrangement, triggering the application of the so called streaming restrictions (the “Streaming Restrictions”) under subsections 111(4), 111(5), 37(6.1) and 127(9.1) of the Income Tax Act (the “Act”); or
(b) the general anti-avoidance rule (the “GAAR”) applied because the conversion was structured to circumvent the Streaming Restrictions in an abusive manner.
This decision involved a motion of Superior Plus to compel CRA to answer refusals, produce unredacted copies of documents that had been redacted and produce documents that had been refused. The Crown on its motion asked for the production of three legal opinions on the basis that solicitor-client privilege had been waived by production of a fourth legal opinion.
Superior Plus was successful on almost all of the refusals and the documentation it sought. The Crown’s motion was dismissed entirely. On both motions the Court took the unusual step of awarding costs in any event of the cause.
Decision: Essentially Superior Plus argued that the questions and documents at issue went to the question of what policy considerations motivated CRA’s use of GAAR:
[26] As additional background information, the Appellant alleges that its conversion, and SIFT conversions in general, attracted the attention of the Canada Revenue Agency (“CRA”). It submits that the Rulings Division of the CRA brought the conversions to the attention of the Department of Finance in late 2008. The Aggressive Tax Planning Division (“ATP”) of the CRA instructed the Calgary office to commence an audit of the Appellant around January 2010 as part of a review of SIFT conversions. The ATP had in turn been instructed by the GAAR Committee to collect facts concerning conversions. The Appellant outlined in considerable detail the various discussions or referrals between the CRA auditors, the ATP and the GAAR Committee, and between the Minister and Finance.
[27] On the basis of documents highlighting these discussions, the Appellant suspects that there was a dispute between Finance and the CRA regarding the application of the GAAR. According to the Appellant, the CRA pressed Finance to amend the law in order to prevent SIFTs from gaining access to the tax attributes of arm’s length taxpayers on their conversions. Finance ultimately shared the CRA’s concern and enacted paragraph 256(7)(c.1) to bar those types of loss trading transactions. However, Finance did not make that provision retroactive. Instead, the Appellant alleges, Finance chose to pressure the Minister to invoke the GAAR to assess the Appellant.
[28] Because of this alleged dispute, the Appellant questions whether the Minister did in fact rely on the policy assumptions set out in paragraph 19 of the Reply, which read as follows:
a) that the general policy of the Act is to prohibit the transfer of losses between arm’s length parties, subject to certain express and permissive exceptions, and that subsection 111(5) (and also the related provisions in respect of the Tax Attributes under subsections 111(4), 37(6.1) and 127(9.1) of the Act) is an anti-avoidance provision designed to prevent arm’s length loss trading from an unrelated business;
b) that the purpose of the SIFT legislation proposing a distribution tax was to restore the balance and fairness to the federal tax system by effecting income tax neutrality on business profits earned by corporations and income trusts; and
c) the Minister assumed that the Conversion Rules for SIFTs, including under subsections 107(3) and (3.1) of the Act, were designed to ensure that income trusts could reorganize as corporations without facing an additional tax burden at the time of conversion, but were not meant to facilitate loss trading between unrelated parties.
[29] The Appellant, in its Amended Answer, puts at issue the Policy identified and allegedly relied on by the Minister. Moreover, the Appellant alleges that the introduction of paragraph 256(7)(c.1) constituted a change in policy under the Act.
[Footnote omitted]
The Crown argued that a taxpayer was not entitled on discovery to explore the mental process of the Minister and her officials:
[30] With the exception of redactions objected to on grounds of privilege, the Respondent justifies most of her refusals on the basis that the Appellant is not entitled to investigate the mental process of the Minister or her officials in raising the assessment. I note that the Respondent adopts an inconsistent position with respect to this objection. For example, the Respondent disclosed the final minutes of the meeting of officials of the GAAR Committee that culminated in the approval of the application of the GAAR. The Respondent justifies this disclosure on the grounds that only those opinions of CRA officials expressed as a group are relevant in the context of a GAAR assessment. This raises the question of why collective opinions on policy should be afforded greater importance than individual views.
The motions Judge took a broad view of the questions that can be asked and the material to be produced on discovery and awarded Superior Plus almost all it sought on its motion:
[33] As correctly pointed out by the Appellant’s counsel, discovery serves a much broader purpose than eliciting evidence that is admissible at trial. For example, the discovery process allows the parties to gauge the weaknesses of their opponent’s case. This promotes the making and/or consideration of settlement offers, an approach that should be welcomed in all cases.
[34] I cannot help but wonder what attitude the Respondent would adopt if the proverbial shoe was on the other foot. For example, let us assume that the Respondent was seeking full access on discovery to the working papers of a taxpayer’s external auditor in which the auditor comments on whether there is any need or not for a tax reserve in the taxpayer’s financial statement to cover the financial risk of an avoidance transaction. In the absence of protection afforded by privilege, I surmise that the Respondent would not accept a refusal based on the argument that opinions on policy are not relevant at the discovery stage.
[35] The Respondent has identified in her Reply the Minister’s findings relating to the Policy. I agree with the Appellant’s submission that the Appellant has the right to probe the facts and circumstances surrounding the pleading of that Policy. Much of what is discovered may ultimately be viewed as altogether irrelevant or inadmissible. However, this is a determination to be made by the trial judge acting as the gatekeeper of the evidence allowed to form part of the trial record.
On the Crown’s motion to compel production of three legal opinions it relied upon the doctrine of “implied waiver” of solicitor-client privilege:
[38] The Respondent, on the basis of implied waiver, seeks the production of three documents with respect to which the Appellant claims solicitor-client privilege. The Respondent argues that the production of a Macleod Dixon Memorandum (the “Macleod Dixon Memorandum”) dated October 24, 2008 entitles the Respondent to the disclosure of three memorandums containing tax advice pertaining to the transactions at issue in the present appeal.
[39] The Appellant alleges that the Fund initially was to be converted under the Exchange Method. The Appellant further alleges that the Fund was advised that the Exchange Method could lead to a change of control of the Fund as defined in its debt indentures, requiring the Fund to redeem its debt at a premium in relation to its face value. This result could be avoided if the Fund’s conversion was carried out under the Distribution Method. This is what was done and the motion record shows that the Fund received advice in the Macleod Dixon Memorandum confirming that the publicly traded debt could be assumed by the Appellant without triggering its early redemption.
[Footnote omitted]
The Court however concluded that the waiver of privilege in the Macleod Dixon Memorandum was limited and did not extend to tax advice on the transactions underlying the current appeal (and hence the three specific tax opinions sought) and dismissed the motion:
[46] In light of the above, I agree with the Appellant’s submission that the Macleod Dixon Memorandum is a stand alone document providing corporate advice on a distinct issue regarding the early redemption of the Fund’s debentures. The Other Legal Opinions contain tax advice on the conversion. In my opinion, there is no unfairness or inconsistency in the Appellant disclosing only the Macleod Dixon Memorandum. As noted above, in Gerbro and Bone the bar with respect to setting aside privilege is high and disclosure should only be ordered when it is “vital or necessary”. I am satisfied that the disclosure of the Macleod Dixon Memorandum does not bring the tax advice received by the Appellant into issue. For these reasons, the Respondent’s motion is dismissed.
The Court awarded costs to Superior Plus on both motions. In an uncommon step the costs were ordered payable in any event of the cause.
TAGS: Income Tax Act, Tax Litigation, Documentary Discovery