The Crown has asked that the reassessments of Part I tax for the years 1996 through 2000 years be restored and confirmed or the judgment be set aside and the matter remitted to the Tax Court of Canada for a new trial before another judge of that court.
The case concerns the payment by General Electric Capital Canada (GECC) of guarantee fees to its indirect parent corporation, General Electric Capital US (GECUS) in the amount of 1%, annually, of the GECC outstanding commercial paper and unsecured debenture obligations during the years under review.
The Tax Court of Canada in a lengthy decision which reviewed and analysed the evidence presented by some 20 witnesses of whom 12 were experts, found that, in the specific circumstances of the case, the guarantee fees paid by GECC were equal to or less than an arm's-length price.
The Crown's appeal cites these specific grounds for appeal:
• 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.
The third ground for appeal will undoubtedly be a focus of the arguments before the Federal Court of Appeal. 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 the 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 advocate,” wrote Justice Robert Hogan.
It will be interesting to see if the Federal Court of Appeal will provide some guidance as to the proper balance to be maintained between this role of the judge and the ability of the parties to present their arguments without undue disruption of the court proceedings.
While the Tax Court decision was disappointing in that it did not provide the necessary clarity as to application of the arm’s-length principle in Canada that had been hoped for, the finding of the Tax Court ,which favoured the taxpayer's position, has not been seriously questioned.
The case will most probably be heard sometime during the autumn of 2010.
In the meantime, the appeal by the taxpayer of the findings of the Tax Court in the GlaxoSmithKline case may well add to the debate as to the proper application of the arm's-length principle to Canadian taxpayers.
Elinore Richardson (ERichardson@blgcanada.com) and Stephanie Wong (SWong@blgcanada.com), Borden Ladner Gervais, Toronto
