Safeway Ontario Finance ULC (continued as 0984470 BC Unlimited Liability Company) v. The Minister of Revenue
[Indexed as: Safeway Ontario Finance ULC v. Ontario (Minister of Revenue)]
Ontario Reports
Ontario Superior Court of Justice,
Gans J.
September 12, 2014
123 O.R. (3d) 227 | 2014 ONSC 5204
Case Summary
Taxation — Income tax — Corporate income tax — Related company seeking to minimize corporate tax by replacing historically earned retained earnings with borrowings from appellant secured by deeds of specialty debt — Interest income earned by appellant on specialty debts being income from property rather than business income — Interest not [page228] subject to corporate income tax by virtue of application of General Anti-Avoidance Rule — Appellant not liable to pay corporate minimum tax — Interest income not being income from property located in Canada as specialty debt instruments were deposited in British Virgin Islands.
CSL, which carried on business in Western Canada, sought to minimize corporate tax by replacing historically earned retained earnings with borrowings from the appellant, a related company in Ontario, secured by deeds of specialty debt. CSL deducted the interest payments made to the appellant on the specialty debts in computing its taxable net income for the purposes of calculating federal and provincial income tax payable. The appellant did not include the interest payments as income for the purposes of the calculation of corporate income tax under the Corporations Tax Act, R.S.O. 1990, c. C.40. The Alberta Court of Appeal found that the deductibility of the interest payments by CSL was acceptable as part of a legitimate tax minimization scheme. The Ontario Minister of Revenue issued notices of reassessment to the appellant requiring it to pay tax on the interest payments. The appellant appealed.
Held, the appeal should be allowed.
The interest income earned by the appellant on the specialty debts was income from property, rather than income from a business carried on in Canada. The income was not taxable by virtue of the application of the Ontario General Anti-Avoidance Rule. The appellant was not liable to pay a corporate minimum tax. The interest income was not income from property situated in Canada, as the specialty debt instruments were deposited in the British Virgin Islands.
Inter-Leasing, Inc. v. Ontario (Minister of Revenue) (2014), 121 O.R. (3d) 209, [2014] O.J. No. 3671, 2014 ONCA 575, revg [2013] O.J. No. 3050, 2013 ONSC 2927, 2013 D.T.C. 5124, [2013] 6 C.T.C. 21, 229 A.C.W.S. (3d) 894 (S.C.J.), folld
Other cases referred to
Canada Safeway Ltd. v. Alberta, [2012] A.J. No. 783, 2012 ABCA 232, [2012] 5 C.T.C. 243, 2012 D.T.C. 5133, 63 Alta. L.R. (5th) 59, [2012] 9 W.W.R. 655, 536 A.R. 6, 352 D.L.R. (4th) 566, 218 A.C.W.S. (3d) 710, affg [2011] A.J. No. 590, 2011 ABQB 329, [2011] 5 C.T.C. 73, 44 Alta. L.R. (5th) 163, [2011] 10 W.W.R. 526, 518 A.R. 344
Statutes referred to
Alberta Corporate Tax Act, R.S.A. 2000, c. A-15 [as am.]
Corporations Tax Act, R.S.O. 1990, c. C.40 [as am.], ss. 2(2) [as am.], 5 [as am.], 37(1), 57.1(2)(b)(ii), Part V, ss. 76(6) [as am.], 85 [as am.], 87 [as am.]
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) [as am.], s. 115
APPEAL from tax reassessments.
Jacques Bernier, Mark Tonkovich and David Gadsden, for appellant.
Anita C. Veiga, Jason DeFreitas and Ryan Mak, for respondent. [page229]
GANS J.: —
Introduction
[1] Canada Safeway Ltd. ("CSL") is a well-known grocery retailer in Western Canada, whose assets were recently bought by Sobey's Inc. At the relevant times, it had but a small presence in the Province of Ontario, limited to a few northern locations. In 2001, CSL and related companies (the "Safeway Group"), on the advice of their accountants and lawyers, put into place a tax plan ("plan") by which they sought to minimize corporate tax payable by CSL in Alberta, and by a "related" company, Safeway Ontario Finance ULC ("Safeway Ontario"), in Ontario, pursuant to the corporate taxing statutes of the two provinces.1
[2] At its simplest, the plan called for CSL to replace historically earned retained earnings with borrowings from another Safeway Group corporation, all of which were secured by six deeds of specialty debt (collectively, the "specialty debts").2 The specialty debts were thereafter transferred to Safeway Ontario, which was a company incorporated pursuant to the laws of the British Virgin Islands ("BVIs") as part of the plan in 2001. From February 2002 to February 2005, CSL paid Safeway Ontario approximately $133 million of interest payments in respect of the debt obligation under the specialty debts, on a total debt obligation of $600 million.3 [page230]
[3] CSL deducted the interest payments made to Safeway Ontario on the specialty debts in computing its taxable net income for the purposes of calculating federal and provincial income tax payable. Safeway Ontario included the corresponding interest payments as income for federal tax purposes, but not for corporate income tax calculation purposes under the OCTA.
[4] In 2008, the Canada Revenue Agency ("CRA"), as agent for the Alberta Minister of Finance and Enterprise, reassessed CSL in respect of the purported deductions taken for the interest payments made to Safeway Ontario under the Alberta Act as an abusive tax avoidance scheme. On appeal to the Alberta Court of Queen's Bench and latterly the Alberta Court of Appeal, leave to appeal to the SCC refused, it was ultimately decided that the deductibility of the interest payments by CSL for the fiscal years in question was acceptable as part of a legitimate tax minimization scheme. In other words, the payments were not found to constitute an abusive tax avoidance scheme under the terms of the Alberta Act.
[5] The CRA, in the alternative, reassessed another Safeway Group company, Canada Safeway Holdings Ltd. ("CSHL"), which received inter-corporate dividends from Safeway Ontario on a tax-neutral basis. The CRA argued that the payments made to CSHL should be subject to Alberta corporate income tax as if the underlying transfer of assets from CSHL to Safeway Ontario of the specialty debts had never taken place. This transfer, the CRA argued, was part of an avoidance scheme that was caught by the Alberta Act's General Anti-Avoidance Rules. An appeal of this reassessment received the same treatment by the Alberta Court of Queen's Bench and Court of Appeal as did the CSL appeal.
[6] In May 2007, the Minister of Revenue for the Province of Ontario ("Minister") issued notices of reassessment to Safeway Ontario in respect of the same three fiscal years under appeal in Alberta (collectively referred to as the "reassessments"). It was the Minister's position that Safeway Ontario was obliged, for a variety of reasons, to include the interest received from CSL during the relevant fiscal years as part of its income upon which corporate tax under the OCTA was exigible. It is from these reassessments that an appeal to this court, by way of a hearing de novo, has been undertaken by Safeway Ontario.4 [page231]
Issues
[7] The parties are in agreement that the issues are as follows:
(1) whether the interest income earned by Safeway Ontario on the specialty debts was income from a business carried on in Canada pursuant to ss. 2(2) and 37(1) of the OCTA, and s. 115 of the Income Tax Act, or income from property;
(2) in the event that I hold that the amount in issue was income from property, and is therefore not taxable under the sections noted above, whether the income is nevertheless taxable by virtue of the application of the Ontario General Anti-Avoidance Rule ("GAAR");6
(3) in the further alternative, in the event that I hold that the interest income is not subject to corporate income tax by definition or under GAAR, is Safeway Ontario liable to pay a corporate minimum tax ("CMT") as income from property situated in Canada or because of a further application of GAAR in respect of the application of CMT?78
[8] Under normal circumstances, I would commence my analysis with a detailed review of the statutory regime under which the plan was devised. To that extent, I am, in part, indebted to counsel for assisting me in understanding the complex regime under which corporations were obliged to function until certain amendments were made to the OCTA.
[9] Simply put, it would appear that corporations incorporated in Canada, either provincially or federally, are subject to tax on worldwide income, whereas s. 2(2) corporations, namely, corporations incorporated elsewhere than in Canada, are taxed on income only from businesses carried on in Canada. Hence, it was agreed that the first threshold issue to determine was whether or not the income of Safeway Ontario was income from a business and that business was one which was carried on in Canada. [page232]
Further Relevant Facts
[10] As an aid to the analysis, it is necessary to repeat certain additional facts which were, in the main, excerpted from the facta of the two parties:
(1) Safeway Ontario was incorporated under the laws of the BVIs in late December 2001, as part of the overall plan;
(2) the specialty debts upon which interest was earned were issued by CSL in favour of CSHL in late 2001 for an aggregate amount of $600 million. The specialty debts were assigned to Safeway Ontario before year-end 2001 in exchange for the latter's common shares;
(3) each of the specialty debts was a debt instrument with a ten-year term executed under CSL's corporate seal. Each entitled its owner to a commercial rate of interest on its principal amount;
(4) the deeds were " . . . deemed to have been made . . ." and were to " . . . be construed in accordance with the laws of the province of Alberta, and the laws of Canada . . ." and were to ". . . be treated in all respects as . . ." Alberta contracts;
(5) the instruments memorializing the specialty debts were deposited with a trust service situated in the BVIs pursuant to a custodial agreement;
(6) CSL paid interest to Safeway Ontario by semi-annual wire payments. In turn, on the same day of the receipt of the aforesaid sums and as a result of a director's resolution passed at a semi-annual board meeting held in Toronto in the board room of its Ontario-based director, Safeway Ontario declared a dividend in an amount equal to the interest received net of federal income tax, Ontario capital tax and administrative expenses;
(7) Safeway Ontario had no employees, officers or agents, although it did have three directors, two of whom were Alberta residents and employees of CSL and one of whom was an Ontario resident and a partner in a Toronto law firm;
(8) Safeway Ontario did not otherwise own, lease, rent, or occupy any real estate or other premises. It did not have its own telephone listing, websites, advertisements, business cards, or other promotional or marketing material, although its mailing address for filing purposes was that of the Toronto law firm. It entered into an administrative services agreement with CSL, which was called upon to perform the remaining nominal administrative tasks required from time to time;
(9) in late 2001, Safeway Ontario acquired units of Multi-Manager Limited Partnership ("MMLP units") for a total of $25,000 through a "trading account" that it maintained at a Toronto-based brokerage firm;
(10) MMLP was a limited partnership with a single permanent establishment located in Ontario. It was accepted by the parties that Safeway Ontario bought these units in order to establish a "permanent establishment in Ontario" as that term is used in the OCTA. Conversely, Safeway Ontario did not have a permanent establishment in any province or territory of Canada other than Ontario during the relevant time.
[11] The same threshold issue described above was considered by Aston J. in an appeal in Inter-Leasing, Inc. v. Ontario (Minister of Revenue)9 ("Inter-Leasing") involving an identical tax plan designed by the same firm of accountants as in the instant case for a group of companies operating in the "oil patch". The appeal judge in that case held that the interest income earned in the tax year was "income from a business carried on in Canada" and, therefore, the taxpayer in that case was obliged to pay corporate income tax, as the Minister contended.
[12] That decision was recently reversed by the Court of Appeal10 in a hearing which was argued a scant two weeks after the appeal before me was heard, and in respect of which I advised counsel I would await before releasing my decision.
[13] Respectfully to counsel who appeared before me in the instant appeal, and notwithstanding the work and effort that each side undertook in that regard, it would be presumptuous of me to engage in a review of the analysis that is found in the clear decision of Pardu J.A. on behalf of the court. I find the analysis and conclusions to be applicable to the matters in issue in the instant appeal since the two tax plans are, as I indicated, virtually identical. Therefore, as was determined by the Court of Appeal in Inter-Leasing, I would hold that the income earned by [page234] Safeway Ontario is income from property and not income from business, as was urged upon me by the Minister.11
[14] Furthermore, and again for the reasons found in the Court of Appeal decision, I conclude that Safeway Ontario is not liable for the corporate income tax sought under GAAR. Finally, and at the risk of repeating myself yet again, I similarly hold that the Court of Appeal's decision makes it equally clear that the CMT is inapplicable in the circumstances. Repeating Pardu J.A.'s analysis in Inter-Leasing would serve no useful purpose at this time.
[15] Under the circumstances, the appeals are allowed. The Minister is hereby directed to vacate the reassessments and reverse the amounts added to the appellant's CMT tax base as "adjusted net income" for purposes of the OCTA during the relevant years.
[16] Unless the parties are able to resolve the issue on their own, which is preferred, they may make written submissions in respect of costs. Safeway Ontario will have 30 days from the date hereof to provide its written submissions, and the Minister an additional 20 days from the date of the receipt of Safeway Ontario's submissions. I would suggest that I receive an "old style" bill of costs, setting out by category the work undertaken by the lawyers involved, with hours and hourly rates set out in detail.
Appeal allowed.
Notes
1 Alberta Corporate Tax Act, R.S.A. 2000, c. A-15 (the "Alberta Act"); Corporations Tax Act, R.S.O. 1990, c. C.40 ("OCTA"). CSL operated in the three other western provinces, whose corporate tax regime paralleled those of the Province of Alberta. Accordingly, I have not segregated those provinces from Alberta for purposes of the recitation of the salient facts of this case.
2 The plan is described in great detail in the judgment of the Hon. Mme Justice E.E. Romaine, Canada Safeway Ltd. v. Alberta, 2011 ABQB 329, and reproduced in a further judgment of the Alberta Court of Appeal, Canada Safeway Ltd. v. Alberta, 2012 ABCA 232 (collectively referred to as the "Alberta decisions"). They are also further described in painstaking detail in the partial agreed statement of facts, Exhibit 1. I am not persuaded that the minutiae of the corporate reorganization undertaken by the Safeway Group needs be repeated for purposes of these reasons.
3 The precise amount of corporate income tax under appeal is $132,812,876 divided into three tranches: $44,029,041 for the fiscal year ending December 28, 2002; $44,875,753 for the fiscal year ending January 3, 2004; and $43,908,082 for the fiscal year ending January 1, 2005. The respondent Minister of Revenue submitted in the alternative that the appellant is obliged to pay an amount by way of "corporate minimum tax", a concept which will be explained later in these reasons, which from a computational point of view is an amount equal to 4 per cent of the aggregate tax owing, or $5,312,515.04.
4 OCTA, ss. 85 and 87.
5 Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA").
6 Ontario General Anti-Avoidance Rule, OCTA, s. 5.
7 OCTA, s. 57.1(2)(b)(ii).
8 There was a fourth issue which was abandoned before argument by the Minister, namely, that in the event that I find that the CMT applied, whether the appellant would then be subject to "gross negligence penalties" as defined in Part V, s. 76(6) of the OCTA.
10 Inter-Leasing, Inc. v. Ontario (Minister of Revenue) (2014), 121 O.R. (3d) 209, 2014 ONCA 575.
11 After the release of the Court of Appeal decision in Inter-Leasing, I invited counsel for the Minister to make representations on the applicability of that decision. Counsel advised me that they were content to rely on the argument advanced before me in the hearing, which essentially parroted the reasons of Aston J., reasons which the Court of Appeal has now rejected.
End of Document