Canada v. Canadian Helicopters Ltd.

Canada v. Canadian Helicopters Ltd. Court (s) Database Federal Court of Appeal Decisions Date 2002-01-22 Neutral citation 2002 FCA 30 File numbers A-289-01 Notes Digest Decision Content Date: 20020122 Docket: A-289-01 Neutral citation: 2002 FCA 30 CORAM: STONE J.A. EVANS J.A. MALONE J.A. BETWEEN: HER MAJESTY THE QUEEN Appellant and CANADIAN HELICOPTERS LIMITED Respondent Heard at Montreal, Quebec, on January 22nd, 2002. Judgment delivered from the Bench at Montreal, Quebec, on January 22nd, 2002. REASONS FOR JUDGMENT OF THE COURT BY: MALONE J.A. Date: 20020122 Docket: A-289-01 Neutral citation: 2002 FCA 30 CORAM: STONE J.A. EVANS J.A. MALONE J.A. BETWEEN: HER MAJESTY THE QUEEN Appellant and CANADIAN HELICOPTERS LIMITED Respondent REASONS FOR JUDGMENT OF THE COURT (Delivered from the Bench at Montreal, Quebec on January 22, 2002.) MALONE J.A. Issue [1] This is an appeal from a judgment of McArthur, J.T.C.C. dated April 9, 2001 which allowed the respondent's appeals from assessments of income tax made under the Income Tax Act for its 1990 and 1991 taxation years (reported at [2001] T.C.J. No. 219). Facts [2] These assessment issues arose from a U.S. $8.95 million loan obtained by the respondent, Canadian Helicopters Limited ("Helicopters"), to purchase shares of a competitor, Viking Helicopters Ltd. ("Viking"), in August of 1989. Helicopters' parent company was CHC Helicopter Holdings Ltd. ("Holdings") and Holdings' parent company was CHC Helicopter Corporation Ltd. ("CHC"). The respondent paid interest on the loan as a result of the share-purchase transaction, although CHC acquired title to the Viking shares. The Minister disallowed Helicopters' claim to deduct the loan interest pursuant to paragraph 20(1)(c) of the Act. Paragraph 20(1)(c) reads as follows: 20. (1) Deductions permitted in computing income from business or property -- Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto: ... (c) interest -- an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing the taxpayer's income), pursuant to a legal obligation to pay interest on (i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy) 20. (1) Déductions admises dans le calcul du revenu tiré d'une entreprise ou d'un bien -- Malgré les alinéas 18(1)a), b) et h), sont déductibles dans le calcul du revenu tiré par un contribuable d'une entreprise ou d'un bien pour une année d'imposition celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qu'il est raisonnable de considérer comme s'y rapportant_: ... c) Intérêts -- la moins élevée d'une somme payée au cours de l'année ou payable pour l'année (suivant la méthode habituellement utilisée par le contribuable dans le calcul de son revenu) et d'une somme raisonnable à cet égard, en exécution d'une obligation légale de verser des intérêts sur_: (i) de l'argent emprunté et utilisé en vue de tirer un revenu d'une entreprise ou d'un bien (autre que l'argent emprunté et utilisé pour acquérir un bien dont le revenu serait exonéré ou pour contracter une police d'assurance-vie) [3] The issue in this appeal is whether the loan interest is deductible. [4] The learned Tax Court Judge held that while the purpose of the loan was to finance the purchase of Viking by the parent corporation, CHC, the respondent had loaned the funds to Holdings using an interest-free loan without conditions, and Holdings in turn loaned the money to CHC, all of which amounted to a direct ineligible use. However, McArthur, J.T.C.C. also determined that the interest was deductible under the exceptional circumstances category referred to by Dickson, C.J.C. in the case of Her Majesty The Queen v. Phyllis Barbara Bronfman Trust, 87 D.T.C. 5059 (S.C.C. ) at p. 5067 and as further explained by Robertson J.A. in 74712 Alberta Ltd. v. The Queen, [1997] 2 F.C. 471 (C.A.). [5] In essence, that analysis holds that interest payments tied to a direct ineligible use may still be deducted where the borrowed funds can be traced to an eligible purpose and use, that is, where the taxpayer can establish both a bona fide purpose and intention to use the funds to earn income as well as a reasonable expectation that the income generated would exceed the interest expense. Argument [6] The Minister argued that the Tax Court Judge erred in determining that the respondent's loan fell within the Bronfman Trust exceptional circumstances category. The transaction was said to be unexceptional as the respondent was a member of a sophisticated corporate group, knowledgeable in business affairs, and there was no legal right in the respondent to receive future revenue from the Viking acquisition. The intention was that the benefit of the purchase would accrue to the group as a whole. Consequently, according to the Minister, this was not what Dickson, C.J.C. had in mind when he referred to "exceptional circumstances" in Bronfman Trust, supra. The Tax Court Judge was also said to have erred by examining events after the transaction closed to ascertain Helicopters' expectation of profit, and whether that expectation was reasonable. Analysis [7] In our view, the Tax Court Judge correctly followed the analysis established in 74712 Alberta Ltd., supra when he held that Helicopters had proven exceptional circumstances warranting the interest deduction. [8] With regard to the bona fide intention element, McArthur, J.T.C.C. found compelling the evidence of the respondent's witnesses to the effect that the true purpose of the loan arrangement was to allow CHC to acquire ownership of Viking. He also found as a fact, based on the evidence, that this course of action was intended to result in benefits to Helicopters and subsequent events proved this to be true. We are satisfied, as found by the Tax Court Judge, that events subsequent to the loan arrangement, such as the management arrangements between Viking and Helicopters, as well as increased business income to Helicopters and reduced competition, provide some evidence of Helicopters' purpose and intention in obtaining the loan. An analysis which excludes consideration of events and evidence arising after the funds have been put to their original use, would severely limit the exceptional circumstances inquiry. In our view, events arising after the fact can have probative value in an exceptional circumstances inquiry. In this respect, the analysis in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622 is of little assistance as the Bronfman Trust exceptional use category was not in issue. [9] Regarding the reasonable expectation that income would exceed interest expense, we are also of the opinion that the Tax Court Judge correctly based his findings on evidence that arose after the share-purchase. The evidence was to the effect that the respondent reasonably expected to earn both management fees after the Viking transaction closed as well as $7.0 million to $8.0 million of gross annual revenue once Viking's operations outside Quebec were amalgamated into its own operation. This amalgamation of operations in fact occurred in 1996. Accordingly, the findings of the Tax Court Judge as to reasonable expectation were all proper based on the record before him. These findings of fact cannot be varied by this Court unless the findings demonstrate some palpable and overriding error which tainted his assessment of the facts. That is not the case here. The existence of a reasonable expectation on the part of a taxpayer that future revenue would exceed the interest paid on a loan is largely a factual question. Accordingly, we cannot accept the contention of counsel for the Minister that, as a matter of law, no reasonable expectation existed in this case because the respondent had no legal right to benefit from either the loan or CHC's acquisition of the Viking shares. Such a requirement would artificially limit the scope of the inquiry. Disposition [10] The appeal will be dismissed with costs. "B. Malone" J.A. FEDERAL COURT OF CANADA APPEAL DIVISION Date: 20020122 Docket: A-289-01 BETWEEN: HER MAJESTY THE QUEEN Appellant and CANADIAN HELICOPTERS LIMITED Respondent REASONS FOR JUDGMENT OF THE COURT FEDERAL COURT OF CANADA APPEAL DIVISION NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKET: A-289-01 CORAM: STONE J.A. EVANS J.A. MALONE J.A. STYLE OF CAUSE: HER MAJESTY THE QUEEN Appellant and CANADIAN HELICOPTERS LIMITED Respondent PLACE OF HEARING: Montreal, Quebec DATE OF HEARING: January 22, 2002 REASONS FOR JUDGMENT OF THE COURT BY MALONE J.A. DATED: January 22, 2002 APPEARANCES: Mr. Peter J. Leslie FOR THE APPELLANT Mr. Pierre Barsalou FOR THE RESPONDENT SOLICITORS OF RECORD: Morris Rosenberg Deputy Attorney General of Canada Halifax, Nova Scotia FOR THE APPELLANT Barsalou Lawson Auger Montreal, Quebec FOR THE RESPONDENT