http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/120355/index.do
Devon Canada Corporation v. Canada (October 8, 2015 – 2015 FCA 214, Trudel, Webb (author), Rennie JJ. A.).
Précis: Devon Canada Corporation (“Devon”) sought to deduct payments made by predecessor corporatons to their employees in exchange for those employees surrendering various share purchase options (the “Surrender Payments”). In its notices of appeal Devon sought to rely upon section 9 of the Income Tax Act (the “Act”) and, in the alternative, paragraphs 20(1)(b)(eligible capital expenditures) and 20(1)(e) (financing expenses). In the Tax Court the Crown argued that neither paragraph 20(1)(b) or (e) was raised as a ground in Devon’s notice of objection and, as a result, sought to strike the impugned paragraphs of the notices of appeal on the basis of the so-called “large corporation” rule. The Tax Court struck the reference to paragraph 20(1)(b) but left the reference to paragraph 20(1)(e) on the basis that this fell within the description of the grounds contained in the notice of objection. Devon appealed and the Crown cross-appealed to the Federal Court of Appeal.
Devon’s appeals were allowed and the Crown’s cross-appeals were dismissed. The Court held that although paragraphs 20(1)(b) and (e) of the Act were covered by the original notice of objection they were specifically referred to a memorandum filed by Devon with the Minister during the course of the objection process. Moreover the Minister specifically addressed those two provisions in confirming the assessment under appeal. As a result Devon was permitted to proceed in the Tax Court on both of the impugned bases. Devon was awarded costs both in the Court of Appeal and the Tax Court.
Decision: These were appeals of a Tax Court decision blogged earlier on this site. The Court of Appeal first concluded that neither subsection 20(10)(b) or (e) were covered by the original notices of objection filed:
[25] Devon could have included alternative arguments in its notice of objection that would be inconsistent with its original position. Devon could have included arguments based on the assumption that the Surrender Payments were on account of capital and that AXL and Numac would have been entitled to deductions under either paragraph 20(1)(b) or 20(1)(e) of the Act. However, having failed to do so, in my view, the issue raised by Devon in its original notice of objection that the Surrender Payments were deductible under section 9 of the Act (and therefore not on account of capital) cannot be considered to include the alternative and inconsistent arguments related to paragraphs 20(1)(b) and 20(1)(e) of the Act. When Devon was seeking, on behalf of AXL and Numac, to claim a deduction under either paragraph 20(1)(b) or 20(1)(e) of the Act it was raising new issues. Each of these paragraphs applies to amounts that would be on account of capital and contain conditions that must be satisfied in order for these provisions to be applicable. Therefore, the nature of the claims is different because the new deductions claimed are based on a different premise (payments on account of capital versus a current expense) and on different statutory provisions each with its own set of conditions.
Nevertheless it found that the Minister was made aware of, and accepted, these provisions as grounds during the objection process:
[8] Following the decision of the Supreme Court of Canada on May 24, 2012 to not grant leave to appeal the decision of this Court in Imperial Tobacco, Devon submitted a memorandum to the Appeals Division of the CRA in which Devon raised, for the first time, the arguments that, in the alternative, it should be allowed a deduction under either paragraph 20(1)(b) or 20(1)(e) of the Act in relation to the Surrender Payments. These paragraphs are set out in the Appendix to these reasons. The amount that would be deductible under either of these paragraphs in the years in question is less than the amount that AXL and Numac had claimed in their tax returns. As well, both of these paragraphs provide a deduction in relation to amounts that would be paid on account of capital. The references herein to the deduction under paragraph 20(1)(b) of the Act include the enhanced deduction under this paragraph as set out in subsection 111(5.2) of the Act and are limited to the additional deduction that would be available under paragraph 20(1)(b) of the Act if the Surrender Payments qualify as eligible capital expenditures.
[9] In a letter dated December 7, 2012, the CRA addressed the issue of whether, in its view, Devon would be entitled to a deduction under either paragraph 20(1)(b) or 20(1)(e) of the Act. The CRA concluded that Devon would not be entitled to any deduction under either of these paragraphs. By a letter dated January 17, 2013 Devon requested further details from the CRA in relation to the position of the CRA on these two paragraphs. The CRA responded on January 29, 2013 with further explanations for its position.
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[30] The interpretation of the reference to “notice of objection” in subsection 169(2.1) of the Act that would be harmonious with the Act, is that this “notice of objection” would include any amendments or additional submissions that are accepted by the Minister. As noted above, the Large Corporation Rules were introduced to allow the Crown to know at the objection stage the nature and quantum of tax litigation. The Minister can end the objection stage at any time by issuing a notice of confirmation or notice of reassessment.
[31] As the Tax Court Judge noted, there is no provision in the Act that specifically allows a large corporation to amend its notice of objection. However, if the Minister allows a large corporation to raise additional issues before the objection stage is completed, it is difficult to accept that the Minister would be prejudiced if the large corporation is allowed to continue to pursue those issues before the Tax Court of Canada. In this case the CRA, acting on behalf of the Minister, responded to Devon in relation to the merits of its submissions with respect to paragraphs 20(1)(b) and 20(1)(e) of the Act and the Minister, in the notices of confirmation, stated that the basis of the objection included the argument that the predecessors of Devon should be entitled to a deduction under paragraph 20(1)(b) of the Act. Therefore, the Minister explicitly accepted that the issue related to paragraph 20(1)(b) of the Act was part of the objection.
[32] Although there is no reference to paragraph 20(1)(e) of the Act in the notices of confirmation, the arguments raised by Devon in relation to paragraph 20(1)(e) of the Act were included in the same memorandum in which it raised the arguments with respect to paragraph 20(1)(b) of the Act. Therefore, if paragraph 20(1)(b) of the Act was part of objection then so also was paragraph 20(1)(e) of the Act.
[33] Since the Minister, while this matter was still at the objection stage, accepted the additional submissions and treated these as part of the objection, these submissions should be considered to be part of the notice of objection for the purposes of subsection 169(2.1) of the Act. Devon should be allowed to appeal to the Tax Court of Canada in relation to these issues. As well, since the Minister accepted these submissions, it is a moot point whether the Minister could have refused to accept them on the basis that they were made well after the time permitted for filing a notice of objection or for seeking an extension of time to file a notice of objection, had expired.
As a result Devon’s appeals were allowed, with costs both in the Court of Appeal and in the Tax Court. The Crown’s cross-appeals were dismissed without costs.
Comment: This is potentially a very important decision for taxpayers. It expands the scope of what has historically been regarded as a notice of objection by incorporating into the concept, to some extent, the ebb and flow of representations and arguments during the objection process. This likely augers well for large corporations involved in complex and lengthy objection files.