Canada: Tax Court of Canada: Foreign rectification orders not binding on CRA unless properly recognised by Canadian courts
Julia Qian Wang
In Canadian Forest Navigation Co Ltd (CFN), the Tax Court of Canada (TCC) determined as a question of law that the Canada Revenue Agency (CRA) is not bound by foreign rectification orders and is not precluded from taking a position contrary to such orders.
CFN had obtained two foreign rectification orders (issued by the Supreme Court of Barbados and the District Court of Nicosia in Cyprus) declaring that amounts that had been paid as dividends by CFN's foreign subsidiaries to CFN were instead loans. The Court was asked whether the CRA was bound by the characterisation set out in the rectification orders which had been obtained by CFN after having received a proposal letter from the CRA challenging the availability of a deduction for such dividends. CFN argued that the foreign rectification orders constituted the judicial reality and that the CRA was bound to accept the characterisation of such amounts as loans. The CRA argued that the foreign rectification orders were only sought by CFN and its foreign subsidiaries to avoid unintended Canadian tax consequences and represented retroactive tax planning. The CRA's position was that it was not bound by the foreign rectification orders because the CRA was not notified of the foreign proceedings and the orders had not been recognised in Canada by a court of competent jurisdiction.
After analysing the applicable law (the civil law of Quebec in this instance) and relevant case law, the Court agreed with the CRA's arguments that the CRA is not bound by the foreign rectification orders on the basis that "under Quebec private international law, foreign judgments are not enforceable in and of themselves", unless they are declared enforceable by the Quebec court following an application for enforcement. Without being recognised by a Quebec court, foreign judgments may only be used as evidence in Canada.
After reviewing the principle of comity underlying the recognition and enforcement of a foreign judgment, the Court concluded that Canadian courts are not to "extend judicial assistance if the Canadian justice system would be used in a manner not available in strictly domestic litigation". The Court further noted that the CRA was not notified of the rectification applications in Barbados and Cyprus, and that such notification would have been required had the rectification application been made in Canada.
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