Canada (Attorney General) v. Ford Credit Canada Ltd.

Canada (Attorney General) v. Ford Credit Canada Ltd. Court (s) Database Federal Court of Appeal Decisions Date 2007-06-11 Neutral citation 2007 FCA 225 File numbers A-410-06 Notes Digest Decision Content Date: 20070611 Docket: A-410-06 Citation: 2007 FCA 225 CORAM: DÉCARY J.A. EVANS J.A. RYER J.A. BETWEEN: ATTORNEY GENERAL OF CANADA Appellant and FORD CREDIT CANADA LTD. Respondent Heard at Ottawa, Ontario, on May 15, 2007. Judgment delivered at Ottawa, Ontario, on June 11, 2007. REASONS FOR JUDGMENT BY: RYER J.A. CONCURRED IN BY: DÉCARY J.A. EVANS J.A. Date: 20070611 Docket: A-410-06 Citation: 2007 FCA 225 CORAM: DÉCARY J.A. EVANS J.A. RYER J.A. BETWEEN: ATTORNEY GENERAL OF CANADA Appellant and FORD CREDIT CANADA LTD. Respondent REASONS FOR JUDGMENT RYER J.A. [1] This is an appeal from a decision of Chief Justice Bowman of the Tax Court of Canada (2006 TCC 441) allowing the appeal of Ford Credit Canada Ltd. (“Ford Credit”) against reassessments of capital tax for its 2001, 2002 and 2003 taxation years under Part I.3 of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the “ITA”). Unless otherwise indicated, all statutory references in these reasons are to the corresponding provisions of the ITA for the taxation years under consideration. [2] Chief Justice Bowman ordered the Minister of National Revenue (“the Minister”) to reassess Ford Credit on the basis that the amount of $1,170,000,000 in respect of redeemable and retractable Class C Special Shares that was reflected as a liability in the balance sheet of Ford Credit for each of the taxation years under consideration was not required to be included in its capital for the purposes of the capital tax in Part I.3 of the ITA for any of those years. [3] I am not persuaded that Chief Justice Bowman made any reviewable error in reaching that decision. BACKGROUND [4] The federal budget of April 27, 1989 introduced a deficit reduction tax, contained in Part I.3 of the ITA and referred to as the large corporations tax (the “LCT”), on the “taxable capital employed in Canada” of most corporations. With respect to a corporation that falls within the definition of financial institution in subsection 181(1) (a “financial institution”), the determination of its taxable capital employed in Canada for a taxation year is made in accordance with the provisions of subsection 181.3(1). [5] The taxable capital of a financial institution for a taxation year is determined, pursuant to subsection 181.3(2), to be the difference between the amount of its capital for the year and the amount of its investment allowance for the year. [6] The capital of a financial institution for a taxation year (“capital”) is determined in accordance with the provisions of subsection 181.3(3). In the case of a financial institution other than an insurance corporation, this determination is made at the end of the particular year, in accordance with paragraph 181.3(3)(a). [7] The capital of a financial institution, other than an insurance corporation, for a taxation year is determined under paragraph 181.3(3)(a) to be the amount by which the total of three amounts, determined at the end of the year, namely (a) the amount of its long-term debt, as defined in subsection 181(1),(subparagraph 181.3(3)(a)(i)); (b) the amount of its capital stock, retained earnings, contributed surplus and any other surpluses, (subparagraph 181.3(3)(a)(ii)); and (c) the amount of its reserves, as defined in subsection 181(1), for the year, except to the extent that they were deducted in computing its income under Part I of the ITA for the year, (subparagraph 181.3(3)(a)(iii)) exceeds the total of three other amounts, namely (d) the amount of its deferred tax debit balance at the end of the year, (subparagraph 181.3(3)(a)(iv)); (e) the amount of any deficit deducted in computing its shareholders’ equity at the end of the year, (subparagraph 181.3(3)(a)(v)); and (f) any amount deducted under subsection 130.1(1) or 137(2) in computing its income under Part I of the ITA for the year, to the extent that the amount can reasonably be considered to have been included in any amount referred to in any of paragraphs (a), (b) or (c) of this paragraph. [8] Subsection 181(3) requires that certain amounts and values that have been determined for other purposes are required to be used in the determination of the LCT liability of a corporation for a taxation year. Banks and insurance corporations that are regulated by the Superintendent of Financial Institutions, or a provincial counterpart, are required to use the amounts and values contained in their balance sheets that have been accepted by the Superintendent of Financial Institutions or the applicable provincial regulator. Other corporations, including financial institutions that are neither banks nor insurance corporations, are basically required to use the amounts and values that are contained in their balance sheets if those balance sheets were prepared in accordance with generally accepted accounting principles (“GAAP”) or that would have been contained in their balance sheets if those balance sheets had been prepared in accordance with GAAP. [9] Ford Credit is a financial institution by virtue of paragraph (g) of the definition of financial institution in subsection 181(1) and paragraph 8604(s) of the Income Tax Regulations, C.R.C., c. 945. [10] On July 31, 2001, Ford Credit issued 1,170,000 Class C Special Shares (the “Class C Shares”) to Ford Credit Lending, LP for an aggregate consideration of $1,170,000,000. The Class C Shares were redeemable by Ford Credit, at any time, and retractable by their holder, at any time after July 31, 2002. As a result of the retractability feature, the Class C Shares were classified as a liability for financial reporting purposes in the balance sheets of Ford Credit for its 2001, 2002 and 2003 fiscal periods. In each of those fiscal periods, the balance sheet of Ford Credit was prepared in accordance with GAAP. Expert accountancy evidence before the Tax Court of Canada confirmed this treatment. [11] Ford Credit filed returns for its 2001, 2002 and 2003 taxation years on the basis that the amount of its capital stock (“capital stock”), within the meaning of subparagraph 181.3(3)(a)(ii), did not include any amount in respect of the Class C Shares. [12] In three separate notices of reassessment, each dated December 13, 2004, the Minister reassessed Ford Credit an additional amount of tax under Part I.3 of the ITA, including interest, for each of its 2001, 2002 and 2003 taxation years. The basis of each reassessment was that the amount of $1,170,000,000 in respect of the Class C Shares should have been included in the amount of the capital stock of Ford Credit for each of those taxation years. [13] Ford Credit objected to the reassessments, the Minister confirmed them and Ford Credit appealed to the Tax Court of Canada against them. STATUTORY PROVISIONS [14] The provisions of the ITA that are principally relevant to this appeal are as follows: PART I.3 TAX ON LARGE CORPORATIONS PARTIE I.3 IMPÔT DES GRANDES SOCIÉTÉS 181. (1) For the purposes of this Part, "financial institution", in respect of a taxation year, means a corporation that at any time in the year is … (g) a prescribed corporation; "long-term debt" means … (c) in the case of any other corporation, its subordinated indebtedness (within the meaning that would be assigned by section 2 of the Bank Act if the definition of that expression in that section were applied with such modifications as the circumstances require) evidenced by obligations issued for a term of not less than 5 years, 181. (1) Les définitions qui suivent s'appliquent à la présente partie. « institution financière » Société qui est, à un moment d'une année d'imposition, selon le cas: […] g) une société visée par règlement. passif à long terme » Passif constitué: […] c) de titres secondaires (au sens de l'article 2 de la Loi sur les banques, compte tenu des adaptations nécessaires) émis pour une durée d'au moins cinq ans, si l'émetteur est une autre société. Determining values and amounts Calcul des valeurs et montants (3) For the purposes of determining the carrying value of a corporation's assets or any other amount under this Part in respect of a corporation's capital, investment allowance, taxable capital or taxable capital employed in Canada for a taxation year or in respect of a partnership in which a corporation has an interest, (a) the equity and consolidation methods of accounting shall not be used; and (b) subject to paragraph 181(3)(a) and except as otherwise provided in this Part, the amounts reflected in the balance sheet (i) presented to the shareholders of the corporation (in the case of a corporation that is neither an insurance corporation to which subparagraph 181(3)(b)(ii) applies nor a bank) or the members of the partnership, as the case may be, or, where such a balance sheet was not prepared in accordance with generally accepted accounting principles or no such balance sheet was prepared, the amounts that would be reflected if such a balance sheet had been prepared in accordance with generally accepted accounting principles, or (ii) accepted by the Superintendent of Financial Institutions, in the case of a bank or an insurance corporation that is required by law to report to the Superintendent, or the superintendent of insurance or other similar officer or authority of the province under whose laws the corporation is incorporated, in the case of an insurance corporation that is required by law to report to that officer or authority, shall be used. (3) Pour déterminer la valeur comptable d'un des éléments d'actif d'une société ou tout autre montant en vertu de la présente partie afférent au capital d'une société, à sa déduction pour placements, à son capital imposable et à son capital imposable utilisé au Canada pour une année d'imposition ou afférent à une société de personnes dans laquelle une société a une participation: a) la consolidation et la méthode de comptabilisation à la valeur de consolidation ne peuvent être utilisées; b) sous réserve de l'alinéa a) et sauf disposition contraire de la présente partie, les montants à utiliser sont les suivants: (i) soit ceux qui figurent au bilan présenté aux actionnaires de la société -- s'il s'agit d'une société qui n'est ni une compagnie d'assurance à laquelle le sous-alinéa (ii) s'applique, ni une banque -- ou aux associés de la société de personnes, ou, si un tel bilan n'est pas dressé conformément aux principes comptables généralement reconnus ou si aucun bilan n'est dressé, ceux qui y figureraient si un tel bilan était dressé conformément à ces principes, (ii) soit ceux qui figurent au bilan accepté par le surintendant des institutions financières, s'il s'agit d'une banque ou d'une compagnie d'assurance tenue par la loi de faire rapport au surintendant, ou par le surintendant des assurances ou un autre agent ou autorité semblable de la province où elle est constituée, s'il s'agit d'une compagnie d'assurance tenue par la loi de faire rapport à cet agent ou à cette autorité. Capital of financial institution Capital d'une institution financière 181.3(3) The capital of a financial institution for a taxation year is (a) in the case of a financial institution, other than an authorized foreign bank or an insurance corporation, the amount, if any, by which the total at the end of the year of (i) the amount of its long-term debt, (ii) the amount of its capital stock (or, in the case of an institution incorporated without share capital, the amount of its members' contributions), retained earnings, contributed surplus and any other surpluses, and (iii) the amount of its reserves for the year, except to the extent that they were deducted in computing its income under Part I for the year, exceeds the total of (iv) the amount of its deferred tax debit balance at the end of the year, (v) the amount of any deficit deducted in computing its shareholders' equity at the end of the year; and (vi) any amount deducted under subsection 130.1(1) or 137(2) in computing its income under Part I for the year, to the extent that the amount can reasonably be regarded as being included in the amount determined under subparagraph 181.3(3)(a)(i), 181.3(3)(a)(ii) or 181.3(3)(a)(iii) in respect of the institution for the year; 181.3(3) Le capital d'une institution financière pour une année d'imposition correspond à l'un des montants suivants: a) dans le cas d'une institution financière, sauf une banque étrangère autorisée ou une compagnie d'assurance, l'excédent éventuel du total des éléments suivants à la fin de l'année: (i) les dettes de son passif à long terme, (ii) son capital-actions (ou, si elle est constituée sans capital-actions, l'apport de ses membres), ses bénéfices non répartis, son surplus d'apport et tout autre surplus, (iii) ses réserves pour l'année, sauf dans la mesure où elles sont déduites dans le calcul de son revenu pour l'année selon la partie I, sur le total des montants suivants: (iv) le solde de son report débiteur d'impôt à la fin de l'année, (v) tout déficit déduit dans le calcul de l'avoir des actionnaires à la fin de l'année; (vi) tout montant déduit en application des paragraphes 130.1(1) ou 137(2) dans le calcul de son revenu pour l'année en vertu de la partie I, dans la mesure où il est raisonnable de considérer les déductions comme incluses dans l'un des montants calculés en application des sous-alinéas (i), (ii) ou (iii) relativement à l'institution financière pour l'année; THE DECISION OF THE TAX COURT OF CANADA [15] Chief Justice Bowman held that subsection 181(3) required that the ordinary legal meaning of capital stock, which would have encompassed the Class C Shares, should be rejected in favour of the accounting treatment that was accorded to those shares in the balance sheets of Ford Credit. He noted that the LCT was a tax on capital and that it was not surprising that Parliament mandated recourse to GAAP to determine the base upon which that tax is to be imposed. [16] At paragraph 32 of his decision, Chief Justice Bowman determined, having regard to the decisions in Oerlikon Aérospatiale Inc. v. The Queen, [1998] 4 C.T.C. 2821 (T.C.C.), Manufacturers Life Insurance Company v. The Queen, [2001] 1 C.T.C. 2481 (T.C.C.), PCL Construction Management Inc. v. The Queen, [2001] 1 C.T.C. 2132 (T.C.C.) and Royal Trust Company v. The Queen, [2001] 3 C.T.C. 2268 (T.C.C.) and the plain meaning of subsection 181(3), that the GAAP characterization of terms in a balance sheet is to be used for the purposes of determining the base upon which LCT is computed under Part I.3 of the ITA. On that basis, he concluded that the amount of $1,170,000,000 in respect of the Class C shares that was reflected as a liability in the balance sheets of Ford Credit, for its 2001, 2002 and 2003 taxation years, was not an amount of capital stock and, accordingly, that amount was not subject to tax under Part I.3 of the ITA in any of those taxation years. ISSUE [17] The issue is whether the amounts reflected in the balance sheets of Ford Credit in respect of Class C Shares for the taxation years under consideration constitute a part of the capital stock, and therefore a part of the capital, of Ford Credit for those taxation years. ANALYSIS [18] The Minister argued that Chief Justice Bowman was in error when he concluded that the existing jurisprudence and the plain meaning of subsection 181(3) mandate that the accounting characterization of terms in a balance sheet must be accepted in the determination of the capital of a corporation for LCT purposes. The Minister stated that most components of the capital of a corporation, for LCT purposes, originate in accounting principles and that if a component of capital derives its meaning primarily from GAAP, then the accounting meaning ascribed to that component must prevail. However, according to the Minister, where a component of the capital of a corporation has an ordinary legal meaning, that meaning is to be given precedence. [19] With respect, I do not agree with the suggested dichotomy. The meaning to be accorded to the term capital stock, for the purposes of Part I.3 of the ITA, is to be discerned in light of the provisions of subsection 181(3). In my view, the language of subsection 181(3) does not contemplate a distinction between terms with ordinary legal meanings and terms with primarily accounting meanings. [20] The proper interpretation of subsection 181(3) of the ITA must be determined in the context of its approximately sixteen year history, from mid-1989 to the beginning of 2006. In enacting the LCT as a deficit reduction measure, Parliament must have intended the tax to be temporary in nature. Presumably, Parliament did not envisage that federal deficits would occur each and every year. Against that background, it was open to Parliament either to enact a comprehensive legislative scheme to impose the temporary new capital tax or to adopt a more simplified approach. In my view, in enacting subsection 181(3), Parliament basically chose to adopt a method of computing capital for the purpose of the temporary new tax that was well known to large corporations. The financial statements of large corporations are routinely prepared on an audited basis in accordance with GAAP, and therefore, adopting GAAP as the principal determinant of the capital tax base for most corporations ensured that the new and temporary tax would be relatively simple to implement and administer. However, a complete adoption of GAAP did not occur. [21] When Parliament determined that deviations from GAAP were desirable, the necessary modifications were made by the enactment of specific legislative provisions. Two important components of capital, “long-term debt” and “reserves”, were given statutory meanings in subsection 181(1). In addition, paragraph 181(3)(a) provides that for the purposes specified in the opening portion of subsection 181(3), neither the equity nor the consolidation method of accounting is to be used. Moreover, if subsection 181(3) was not intended to be interpreted as providing that GAAP should be the principal determinant of the capital tax base for most corporations, Parliament could have so stated. [22] Both parties to this appeal referred to the fact that since its enactment in 1989, Part I.3 of the ITA has undergone a number of amendments. In 1997, an amendment was made to subsection 181.2(3) to provide for the inclusion of deferred unrealized foreign exchange gains and losses in the computation of the capital of corporations other than financial institutions. In my view, this Parliamentary action in addressing a perceived deficiency in the GAAP treatment of deferred unrealized foreign exchange gains and losses in relation to LCT, supports the proposition that Parliament intended to defer to GAAP as the principal determinant of capital for the purposes of the LCT, except to the extent specifically otherwise provided in Part I.3 of the ITA. [23] A similar view was expressed by the Department of Finance in a “comfort letter”, dated August 24, 1995, that was referred to in the Minister’s factum. The letter dealt with the changes to subsection 181.2(3) that were referred to above and a portion of it is apposite: As you are no doubt aware, it is generally the Department’s policy to defer to Generally Accepted Accounting Principles (“GAAP”) in the calculation of capital for the purposes of LCT. However, the consideration of foreign exchange gains and losses in accordance with GAAP could lead to changes in a company’s LCT where there has been no change in the make-up of the company’s capital base. This is undesirable from a policy perspective, so a narrow exception to the application of GAAP is adopted. [24] Subsection 181(3)(b)(ii) illustrates that Parliament intended to rely upon external standards in relation to the determination of LCT liability. That provision applies to banks and insurance corporations and specifies that the amounts reflected in the balance sheets of those corporations that have been accepted by their regulators are required to be used, without condition or qualification, for the purposes described in the opening portion of subsection 181(3). [25] The Minister relies on the decisions in Oerlikon and Autobus Thomas as support for the proposition that at least with respect to certain components of the capital of a taxpayer, the legal nature of the particular component, rather than its GAAP characterization on the balance sheet of the taxpayer, determines the significance of that component. While that argument is not entirely devoid of merit, neither of those cases dealt squarely with the issue of the interpretation of subsection 181(3). Moreover, each of those decisions considered a situation in which the particular amount in issue had been reflected in the balance sheet of the particular taxpayer who nonetheless argued for the exclusion of that amount from tax under Part I.3 of the ITA. [26] The Minister also referred to Manufacturers Life Insurance Company, which, unlike Oerlikon and Autobus Thomas , squarely dealt with subsection 181(3). In that case, the taxpayer was an insurance corporation that was referred to in subparagraph 181(3)(b)(ii) and as such, its balance sheet was provided to, and accepted by, the Superintendent of Financial Institutions for the taxation year under consideration. At issue was the unamortized portion of a gain that the taxpayer did not include in its balance sheet. The Minister assessed the taxpayer on the basis that the particular amount should have been included in the capital of the taxpayer for LCT purposes. In dismissing the Minister’s appeal, Rothstein J.A. (as he then was) dealt with the effect of subparagraph 181(3)(b)(ii), stating, at paragraphs 5 and 6, as follows: [5] It is common ground that the unamortized portion of realized gains in this case are not reflected on the balance sheet of the respondent as reserves or surpluses. The evidence established that the balance sheet was accepted by the Superintendent. Subparagraph 181(3)(b)(ii) requires that the amounts in respect of the company’s capital be the amounts reflected in the balance sheet of the company accepted by the Superintendent. There is no scope for the Minister to change these amounts or characterizations which have been accepted by the Superintendent and they must be used for the purposes of capital tax. [6] Yet, the Minister argues that subparagraph 181(3)(b)(ii) only requires that the respondent’s balance sheet be used as the starting point and that adjustments or changes to the characterization of items on the balance sheet can be made for the purpose of assessing capital tax. For the reasons I have given, I do not think that this argument is open to the Minister. However, for completeness, I will briefly deal with the Minister’s argument. [Emphasis added.] [27] In my view, this decision is far from helpful to the Minister in this appeal. In essence, Rothstein J.A. determined that the balance sheet of the taxpayer must be accepted for LCT purposes if it was accepted by the Superintendent of Financial Institutions. In my view, the same logic should apply where the corporation in question is subject to subparagraph 181(3)(b)(i) rather than subparagraph 181(3)(b)(ii). On that basis, provided that the balance sheet in question has been prepared in accordance with GAAP and otherwise complies with the specific provisions of Part I.3, that balance sheet must be accepted for the purposes of the determination of the LCT liability of the corporation. [28] This is not to say that the Minister or the courts are precluded from any consideration of a balance sheet that is said to have been prepared in accordance with GAAP. It would always be open to the Minister to argue that the balance sheet description of a particular item was not in fact in accordance with GAAP. The courts would then be required to adjudicate the question, having regard to expert accountancy evidence. See Inco Ltd. v. Canada, 2007 TCC 1, [2007] T.C.J. No. 2. [29] Counsel for the Minister argued that subparagraph 181(3)(b)(i) should be read as requiring the use of GAAP as they were at the time that Part I.3 of the ITA came into force in 1989. In my view, this argument is untenable. If Parliament had intended such a result, it would have been relatively easy for the LCT legislation to have so stated. Moreover, such an approach would have defeated the purpose of adopting a simple and practical method of administering the LCT. Under this approach, a corporation would have to prepare two separate balance sheets: one under “current” GAAP, for its shareholders, and another under “1989” GAAP, for LCT purposes. In my view, such a result could not have been intended by Parliament. CONCLUSION [30] It is undisputed that the amounts reflected in the balance sheets of Ford Credit in respect of the Class C Shares, for its 2001, 2002 and 2003 taxation years, were properly characterized as liabilities of Ford Credit under GAAP. Moreover, there was no suggestion that any provision of Part I.3 specifically mandated an alternate characterization. Accordingly, for the reasons given, those amounts are not required to be included in the capital of Ford Credit, for the purposes of Part I.3 of the ITA, in any of those taxation years. DISPOSITION [31] For these reasons, I would dismiss the appeal with costs. “C. Michael Ryer” J.A. “I agree Robert Décary J.A.” “I agree John M. Evans J.A.” FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKET: A-410-06 STYLE OF CAUSE: Attorney General of Canada v. Ford Credit Canada Limited PLACE OF HEARING: Ottawa, Ontario DATE OF HEARING: May 15, 2007 REASONS FOR JUDGMENT BY: Ryer J.A. CONCURRED IN BY: Décary J.A. Evans J. DATED: June 11, 2007 APPEARANCES: Ms. Catherine Letellier De St-Just Mr. Harry Erlichman FOR THE APPELLANT Mr. David E. Spiro Mr. Edward P. Miller FOR THE RESPONDENT SOLICITORS OF RECORD: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Ontario FOR THE APPELLANT Blake, Cassels & Graydon LLP Toronto, Ontario FOR THE RESPONDENT