In Industries Perron Inc. v. The Que en , 2013 FCA 176, the Federal Court of Appeal (FCA) disallowed a deduction for amounts deposited to secure potential US softwood countervailing or anti-dumping duties. Under s. 20(1)(vv) a specific deduction is available for amounts “paid as or on account of an existing or proposed countervailing or anti-dumping duty”. In Industries Perron, the company (Canco) did not pay a cash deposit directly to the US authorities (in respect of a preliminary determination that such duties were payable). Rather, Canco employed a more complex security arrangement to secure payment of the proposed duties:
- Canco’s insurance company guaranteed Canco’s obligation to the US authorities;
- The insurance company’s guarantee was secured by irrevocable letters of credit issued by Canco’s bank;
- Canco purchased term deposits at the bank; and
- Canco hypothecated its term deposits to the bank, as security for Bank’s letters of credit.
Canco argued that the amount paid to purchase its term deposits could be deducted under s. 20(1)(vv) . The FCA disagreed. Citing Shell Canada Ltd. v. The Queen, the FCA said that a taxpayer “will be held to the form of transaction which it has chosen so long as that form is consistent with the actual legal effect of the transaction” (paragraph 37). Here the form of the transaction simply did not engage s. 20(1)(vv). More specifically, the FCA held that either no amount was actually “paid” by Canco, or alternatively, if an amount was paid by Canco, it was not paid “as or on account of existing or proposed duties” (paragraph 39). The case is a useful reminder that the principle in Shell Canada applies with equal force whether the taxpayer or the Crown is relying on it: in Canadian tax law, form matters (paragraph 36).