On January 4, 2010, the Crown filed with the Federal Court of Appeal its Notice of Appeal of the Tax Court of Canada’s judgment (issued on December 4, 2009) in the case of General Electric Capital Canada Inc. v. The Queen. (Please click here to read the Tax Court’s decision.)
The Crown has asked that the reassessments of Part I tax for the 1996 through 2000 taxation years be restored and confirmed or, in the alternative, that the judgment be set aside and the matter remitted to the Tax Court for a new trial before another Tax Court judge.
The case concerns the payment by General Electric Capital Canada Inc. (GECC) of guarantee fees during the years under review to its indirect parent corporation, General Electric Capital US (GECUS) in the amount of 1%, annually, of GECC’s outstanding commercial paper and unsecured debenture obligations.
In a lengthy decision which reviewed and analyzed in some detail the evidence presented by some 20 witnesses of whom 12 were experts, the Tax Court found that, in the specific circumstances of the case, the guarantee fees paid by GECC were equal to or below an arm's length price.
The Crown's appeal cites the following grounds for appeal (leaving open other grounds):
- an error in law in identifying and applying the relevant transfer pricing principles and methodology,
- errors in findings of fact or conclusions of mixed fact and law,
- deprivation of its rights to natural justice and procedural fairness insofar as the trial judge intervened excessively in the questioning of witnesses, failed to apply the rules of evidence and failed to provide evidentiary rulings, all of which created a reasonable apprehension of bias.
Those who have waded through the Tax Court decision will have noted the extended comment by the trial judge as to the role of experts at trial and, more particularly, the duty of judges to ensure that experts act in conformity with that role. “The judge has liberty to intervene in the proceedings in the interest of truth, provided he gives both parties full latitude to address the points raised by his questions. ... I believe that not only questions for the purpose of clarification are permissible when dealing with experts, but also questions designed to ensure that the attitude of the expert witnesses has not become that of an advocate.” While the Tax Court decision was disappointing in that it did not provide much needed clarity regarding the application of the arm's length principle in Canada, the findings of the Tax Court which favoured the taxpayer's position have not been seriously questioned.
The appeal will most likely be heard sometime during the fall of 2010.
In the meantime, the appeal by the taxpayer of the findings of the Tax Court in the case of GlaxoSmithKline v. The Queen may well add to the debate as to the proper application of the arm's length principle to Canadian taxpayers. (Please click here to read the Tax Court decision in that case.)