Minister of National Revenue v. General Electric Capital Canada Inc., 2010 FCA 344

• Judge: Noël, Pelletier and Mainville, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: Tuesday November 16, 2010
• Jurisdiction: Canada (Federal)
• Citations: 2010 FCA 344;(2010), 414 N.R. 304 (FCA)

MNR v. General Electric Capital Can. Inc. (2010), 414 N.R. 304 (FCA)

MLB headnote and full text

Temp. Cite: [2011] N.R. TBEd. JA.006

Her Majesty the Queen (appellant) v. General Electric Capital Canada Inc. (respondent)

(A-1-10; 2010 FCA 344)

Indexed As: Minister of National Revenue v. General Electric Capital Canada Inc.

Federal Court of Appeal

Noël, Pelletier and Mainville, JJ.A.

December 15, 2010.

Summary:

A Canadian corporate financier (the respondent) financed a substantial portion of its operations by issuing commercial paper and debentures (debt issuances). The respondent's US parent company provided it with an explicit guarantee for its debt issuances. Beginning with the 1996 taxation year, for the same guarantee, the parent company charged the respondent a fee equal to 1% of the face amount of the debt issuances. The respondent deducted this fee in computing its income. The Minister of National Revenue issued assessments disallowing the deduction for the taxation years 1996-2000 on the basis that such fees would not have been paid by an arm's length party for the guarantee provided. The respondent appealed.

The Tax Court of Canada allowed the appeal. The Minister appealed.

The Federal Court of Appeal dismissed the appeal.

Courts - Topic 590

Judges - Duties - Duty to appear just and impartial - The Federal Court of Appeal held that "excessive" questioning by a Tax Court judge about an issue that had no substantial connection with the outcome did not constitute bias - See paragraphs 88 to 91.

Income Tax - Topic 3047

Computation of income - Inadequate considerations - Payment to non-resident - Not at arm's length (s. 69(2), now ss. 247(2)(a) and 247(2)(c)) - A Canadian corporate financier (the respondent) financed a substantial portion of its operations by issuing commercial paper and debentures (debt issuances) - The respondent's US parent company provided it with an explicit guarantee for its debt issuances - Beginning with the 1996 taxation year, for the same guarantee, the parent company charged the respondent a fee equal to 1% of the face amount of the debt issuances - The respondent deducted this fee in computing its income - The Minister of National Revenue invoked s. 69(2), replaced by ss. 247(2)(a) and 247(2)(c), of the Income Tax Act (Can.) and issued assessments that disallowed the deduction on the basis that such fees would not have been paid by an arm's length party for the guarantee provided - A Tax Court judge vacated the assessments - The judge used the "yield method" to determine the arm's length price - This method was based on a comparison between the credit rating which an arm's length party, in the same circumstances as the respondent, would have obtained and the credit rating which would have been obtained without the explicit guarantee - The judge found that a gap existed between the credit rating which the respondent would have obtained with and without the explicit guarantee, and that the 1% guarantee fee was within this gap - The Federal Court of Appeal upheld the decision, absent error - The court added that "implicit support" was a factor which an arm's length person would have found relevant in pricing the guarantee - Finally, the court held that the judge did not err in finding, based on objective evidence, that the explicit guarantee was necessary here to compare the credit ratings - See paragraphs 1 to 82.

Income Tax - Topic 3047

Computation of income - Inadequate considerations - Payment to non-resident - Not at arm's length (s. 69(2), now ss. 247(2)(a) and 247(2)(c)) - Section 69(2) of the Income Tax Act (Can.), replaced by ss. 247(2)(a) and 247(2)(c), provided that the Minister of National Revenue had the authority to make transfer pricing adjustments where, inter alia, a taxpayer had paid to a non-resident person with whom it was not dealing at arm's length as payment for property or services an amount greater than the amount which a person dealing an arm's length purchaser would have paid - The Federal Court of Appeal held that the "concept underlying subsection 69(2) and paragraphs 247(2)(a) and (c) is simple. The task in any given case is to ascertain the price that would have been paid in the same circumstances if the parties had been dealing at arm's length. This involves taking into account all the circumstances which bear on the price whether they arise from the relationship or otherwise" - See paragraphs 3, and 47 to 55.

Cases Noticed:

Heron Bay Investments Ltd. v. Minister of National Revenue (2010), 405 N.R. 73; 2010 FCA 203, consd. [para. 38].

GlaxoSmithKline Inc. v. Minister of National Revenue (2010), 405 N.R. 307; 2010 FCA 201, consd. [para. 58].

R. v. Sheppard (C.), [2002] 1 S.C.R. 869; 284 N.R. 342; 211 Nfld. & P.E.I.R. 50; 633 A.P.R. 50; 2002 SCC 26, refd to. [para. 92].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 69(2) [para. 10]; sect. 247(2)(a), sect. 247(2)(c) [para. 11].

Authors and Works Noticed:

Organization for Economic Co-operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, para. 1.6 [para. 57].

Counsel:

Naomi Goldstein, William Softley and Justine Malone, for the appellant;

Al Meghji, Joseph M. Steiner, Neil Paris and Martha MacDonald, for the respondent.

Solicitors of Record:

Myles J. Kirvan, Deputy Attorney General of Canada, Ottawa, Ontario, for the appellant;

Osler, Hoskin & Harcourt LLP, Toronto, Ontario, for the respondent.

This appeal was heard at Toronto, Ontario, on November 16, 2010, by Noël, Pelletier and Mainville, JJ.A., of the Federal Court of Appeal. The following decision of the Court of Appeal was delivered by Noël, J.A., at Ottawa, Ontario, on December 15, 2010.