[2013] 3 F.C.R. D-14
Income Tax
Income Calculation
Deductions
Appeals from two interlocutory orders of Tax Court of Canada (T.C.C.) (2011 TCC 568, 2012 TCC 237) made in appellant’s appeals from Minister of National Revenue’s reassessments—Both parties appealing T.C.C.’s first order allowing in part appellant’s motion to strike respondent’s reply (A-4-12 and A-5-12)—Respondent also appealing second order, relating to draft reply submitted by respondent in its attempt to comply with first order (A-331-12)—Main issue in all appeals involving whether, in computing appellant’s business income, amount of approximately $3 billion representing settlement payments deductible—Appellant making settlement payments primarily to settle litigation resulting from transactions involving appellant, other corporation whereby transactions allegedly mischaracterized to embellish corporation’s financial reports—Settlement payments deducted in computing appellant’s profit for income tax purposes—Minister of National Revenue disallowing deduction of appellant’s settlement payments, confirming reassessments on basis of Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 18(1)(a),(b),(e)—Before T.C.C., appellant submitting that deduction claimed complying with Act, ss. 3, 9, not prohibited by ss. 18(1)(a),(b),(e)—Appellant seeking to strike respondent’s amended reply, in particular given specific allegation therein that, because of appellant’s egregious, repulsive misconduct in transactions leading to lawsuit, deductions claimed cannot be justified within meaning of Act, s. 18(1)(a)—Arguing that interpretation, application of s. 18(1)(a) cannot turn on moral evaluation of appellant’s conduct—Respondent arguing that paragraph in reply embodying legal principle found in 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804—T.C.C. concluding in particular, that respondent’s reply stating reasonable basis for defending reassessments, that not plain, obvious that respondent’s theory cannot succeed; dismissing portion of appellant’s motion to strike dealing with issue of morality—S.C.C. case relied on establishing that not open to courts to expand scope of prohibition in Act, s. 18(1)(a) to give effect to unlegislated public policy considerations—Also rejecting Federal Court of Appeal’s reasoning in previous leading case denying deduction for penalty imposed because penalty avoidable or because allowing deduction would be against public policy—Respondent relying on obiter dictum in S.C.C. case to argue that deduction of expense incurred may be prohibited under s. 18(1)(a) if conduct “egregious or repulsive”—Respondent misinterpreting obiter dictum, T.C.C. erring in law when accepting respondent’s submission—Obiter recognizing that certain conduct may, because of egregious or repulsive nature, be so disconnected factually from taxpayer’s actual business that expense taxpayer incurring because of conduct cannot meet income earning purpose test—Obiter not suggesting that conduct in fact undertaken by taxpayer to earn income from business can be disconnected from business for income tax purposes solely because conduct egregious or repulsive—In conclusion, based on obiter, only relevant question to be asked in determining whether s. 18(1)(a) prohibiting particular deduction is whether taxpayer incurring expense for purpose of earning income—Thus, in present case, even if appellant conducting itself as alleged in lawsuits, even if conduct deemed egregious, repulsive, characterization of morality of appellant’s conduct not legally relevant to application of s. 18(1)(a)—Therefore, paragraph at issue in respondent’s reply struck; factual assumptions or allegations elsewhere in reply asserting moral evaluation of appellant’s conduct also struck—Appellant’s appeal in A-4-12 allowed; respondent’s appeals in A-5-12, A-331-12 dismissed.
Canadian Imperial Bank of Commerce v. Canada (A-4-12, A-5-12, A-331-12, 2013 FCA 122, Sharlow J.A., judgment dated May 6, 2013, 43 pp.)