CIT GROUP SECURITIES (CANADA) INC., Appellant, v. HER MAJESTY THE QUEEN,, 2016 TCC 163

Dockets: 2012-950(IT)G, 2013-1251(IT)G, 2013-1252(IT)G, 2013-1253(IT)G, 2013-1254(IT)G, 2013-2961(IT)G, and 2013-2962(IT)G BETWEEN: CIT GROUP SECURITIES (CANADA) INC., Appellant, and HER MAJESTY THE QUEEN, Respondent . Appeals heard on January 19, 20, 21 and 22, 2015 and November 9, 10, 12, 13, 16, 17, 19 and 20, 2015, at Toronto, Ontario Before: The Honourable Justice John R. Owen Appearances : Counsel for the Appellant: Edwin G. Kroft, Q.C., Paul K. Tamaki and Deborah J.

Toaze Counsel for the Respondent: Elizabeth Chasson, Darren Prevost and Leonard Elias JUDGMENT In accordance with the attached Reasons for Judgment, the appeals from the reassessments made under the Income Tax Act (“ ITA ”) for the 2003, 2004, 2005, 2006, 2007, 2008 and 2009 taxation years (“ relevant period ”) are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the income of CCG Trust Corporation throughout the relevant period was not subject to the application of paragraph 95(2)(

l) of the ITA. The parties have 30 days from the date of this Judgment to make submissions as to the award of costs. Signed at Ottawa, Canada, this 4th day of July 2016. “J.R. Owen” Owen J. Citation: 2016 TCC 163 Date: 20160 704 Dockets: 2012-950(IT)G, 2013-1251(IT)G, 2013-1252(IT)G, 2013-1253(IT)G, 2013-1254(IT)G, 2013-2961(IT)G, and 2013-2962(IT)G BETWEEN: CIT GROUP SECURITIES (CANADA) INC., Appellant, and HER MAJESTY THE QUEEN,

Respondent. REASONS FOR JUDGMENT Owen J. I. Introduction [ 1 ] These reasons address the appeals by CIT Group Securities (Canada) Inc. (the “ Appellant ”) from reassessments (collectively, the “ Reassessments ”) of its 2003, 2004, 2005, 2006, 2007, 2008 and 2009 taxation years (collectively, the “ Taxation Years ”).

The appeals were heard on common evidence. [ 2 ] The Reassessments included in the income of the Appellant, as income from shares, amounts in respect of income earned by controlled foreign affiliates (“ CFAs ”) of the Appellant during 2003 through 2009 (the “ relevant period ”), on the basis that such income was “ foreign accrual property income ” (“ FAPI ”) as defined in subsection 95(1) of the Income Tax Act (the “ ITA ”). [1] The additional amount assessed for each of the Taxation Years is as follows: Taxation Year FAPI [2] 2003 $41,366,142 2004 $37,710,239 2005 $44,024,634 2006 $29,047,662 2007 $23,375,091 2008 $23,891,920 2009 $20,950,086 [ 3 ] The sole issue in these appeals is whether paragraph 95(2)(

l) applies to include the income earned by CCG Trust Corporation (“ CCG ”) during the relevant period in its income from property. If paragraph 95(2)(

l) does apply, the Reassessments must stand, subject only to an agreed-upon adjustment to reflect the correct relevant tax factor for each of the Taxation Years. [3] If paragraph 95(2)(

l) does not apply, the Appellant must be reassessed for each of the Taxation Years to delete the amounts set out in the chart above together with any interest and penalties that resulted from the inclusion of such amounts in the income of the Appellant. [ 4 ] At the commencement of the hearing, the Respondent conceded that throughout the relevant period the Appellant met the requirements of subparagraph 95(2)( l )(iv). [4] Accordingly, the only questions that need be addressed are whether the income of CCG earned during the relevant period is caught by the opening words of paragraph 95(2)(

l) and, if it is, whether CCG meets the requirements in subparagraph 95(2)( l )(iii) for the exception from inclusion of that income in CCG’s income from property. [ 5 ] Four witnesses testified for the Appellant. The first witness for the Appellant was Mr. James Shanahan, who is the chief regulatory counsel of CIT Group Inc. (“ CITG ”), a United States corporation and the ultimate parent of the Appellant. Mr. Shanahan has been employed by CITG since 1987 and is based at CITG’s office in Livingston, New Jersey.

He has held his current position for approximately 10 years and reports to the general counsel of CITG. [ 6 ] The other three witnesses [5] are former managing directors of CCG each of whom held that office during a portion of the relevant period. Following their employment by CCG, two of the three former managing directors continued to be employed in the CITG group of companies and the third sought employment elsewhere. [ 7 ] I found all four of these witnesses to be straightforward and credible. [ 8 ] The Appellant also presented two expert witnesses: Sir Trevor Carmichael, Q.C. and Mary Mahabir, Q.C.

Sir Trevor Carmichael, Q.C. is a lawyer who was called to the Middle Temple in London and to the Barbados Bar in December 1977. Sir Trevor Carmichael’s practice includes the area of commercial law. Ms. Mary Mahabir, Q.C. is a lawyer who was called to the Barbados Bar in October 1981. Ms. Mahabir’s practice is in the areas of corporate and commercial law.

Neither expert had acted for CCG or the Appellant at any time in the past. [6] [ 9 ] The expert witnesses submitted expert reports and testified regarding the relevant corporate law and commercial law of Barbados and their application to CCG during the relevant period. In particular, the experts described their understanding of the Financial Intermediaries Regulatory Act ,

Chapter 324A of the Laws of Barbados (the “ FIRA ”), the Financial Institutions Act ,

Chapter 324A of the Laws of Barbados (the “ FIA ”), [7] the Companies Act ,

Chapter 308 of the Laws of Barbados (the “ BCA ”) and the Central Bank of Barbados Act ,

Chapter 323C of the Laws of Barbados (the “ CBA ”) and the application of those statutes to CCG during the relevant period. II. Facts A. Overview of the Structure

[ 10 ] The structure in place during the relevant period is reproduced in Appendix A of these reasons. [ 11 ] The Appellant was the sole shareholder of eight international business corporations incorporated and resident in Barbados, [8] and the Appellant and CIT Financial Ltd. (“ CITF ”) were the only shareholders of a ninth international business corporation incorporated and resident in Barbados. [9] I will refer to the nine international business corporations collectively as the “ IBCs ”. [ 12 ] The eight IBCs wholly owned by the Appellant each owned a single separate class of voting common shares in CCG. [10] Collectively, these shares represented 76,000 votes in CCG.

The ninth IBC owned 1,000 Class A common shares in CCG carrying 1,000 votes per share - for a total of 1 million votes - and 1,650,000 Class P non-voting common shares. The total issued share capital of CCG throughout the relevant period was $1,659,000. [11] [ 13 ] The shareholders of the Appellant were CITF and CCG Partners 1 Limited Partnership (“ CCG LP ”).

CITF owned 20 special shares in the Appellant that entitled it to 100 million votes per share for a total of 2 billion votes. [12] [ 14 ] CCG LP owned all of the issued Class A common shares in the Appellant, which represented approximately 38% of the voting shares in the Appellant. [13] Each limited partner in CCG LP owned a class of units in the partnership that tracked the performance of one of the IBCs owned by the Appellant.

This means that if a particular partner’s interest tracked a particular IBC and the IBC declared and paid a dividend to the Appellant, the Appellant would declare and pay a dividend in the same amount to CCG LP and CCG LP would allocate and distribute the amount of the dividend to the partner. [ 15 ] CITG owned all of the issued shares of CIT Bank (“ CITB ”), a corporation incorporated in the state of Utah, USA. [14] [ 16 ] CITF was an indirect subsidiary of CITG. [15] CITF in turn held the majority of votes in the Appellant. [ 17 ] The Appellant controlled each of the IBCs, and the ninth IBC, Adams, controlled CCG.

Accordingly, the Appellant also controlled CCG. [ 18 ] The parties agree that throughout the relevant period each of the IBCs and CCG was a “ controlled foreign affiliate ” of the Appellant as defined in subsection 95(1) of the ITA. [16] B. CITG and CITB [ 19 ] CITG is a corporation incorporated and resident in the United States the shares of which are listed on the New York Stock Exchange. [17] Mr. Shanahan described his role in CITG as follows: I have to oversee the attorneys who handle review of our securities filings, bank regulatory work, sanctions issued through OFAC, through OSFI, through Bank of England.

We work with the compliance department on anti-money laundering, advising them on anti-money laundering. It is basically a variety of regulatory aspects other than tax. We have a separate tax department for that. [18] [ 20 ] Mr. Shanahan described the business of CITG during the relevant period as follows: We provided financing and leasing services to small- and medium-size businesses, the transportation industry, and for a portion of that period, we would also provide certain consumer loans, in terms of home equity, student loans, and I think some manufactured housing. [19] [ 21 ] Mr.

Shanahan described the principal purpose of the business of CITG over the same period as being to provide “ financing and leasing to small businesses, middle market companies, and the transportation industry. ” [20] [ 22 ] The largest portion of CITG’s business was in the United States and the second largest was in Canada.

CITG also conducted business in Europe, Latin America and Asia. [21] During the relevant period, the CITG group of companies had anywhere from 4,000 to 7,700 employees worldwide and assets in the range of US$45 billion to US$90 billion. [22] [ 23 ] The business of CITG was conducted through business units that each targeted specific business segments. The business units were referred to as Business Segments. [23] A business unit was managed as a single entity even though it might actually comprise a large number of legal entities within the CITG group of companies.

For example, one business unit (or Business Segment) was equipment financing, which was conducted through perhaps 15 separate legal entities. [24] [ 24 ] CITG files a form 10-K with the United States Securities and Exchange Commission (the “ SEC ”) on an annual basis. [25] In addition, CITG files form 10-Q quarterly and form 8-K periodically, and also files proxy statements. [26] [ 25 ] Mr. Shanahan stated that he “ put together certain sections of the 10-K related to risk factors and the description of our regulatory environment ”. [27] As well, Mr.

Shanahan would review each such 10-K to “ see if there is anything that looks out of character with my understanding of the business. ” [28] When asked if CITG tried to be accurate in the 10-Ks, Mr.

Shanahan stated that “. . . we endeavour to make sure that it [the 10-K] gets checked by multiple parties in order to ensure it is as accurate as we can. ” [29] He also stated that the SEC reviewed the 10-Ks and provided a comment letter in which they could ask for clarification of certain issues or for justification of the accounting treatment of certain issues. [30] [ 26 ] The Respondent objected to any reliance on the contents of the 10-Ks for determining matters of U.S. law on the basis that such matters were the purview of a suitably qualified expert. [31] [ 27 ] I agree with the Respondent that the testimony of Mr.

Shanahan and the descriptions in the 10-Ks of the U.S. regulatory

environment cannot be used as a substitute for expert evidence on relevant U.S. law, nor can these sources be used as a substitute for expert evidence on the status of CITG or CITB under relevant U.S. law. [32] [ 28 ] Mr. Shanahan testified to his understanding that the only bank subsidiary of CITG throughout the relevant period was CITB, which he stated was chartered by the Utah division of Financial Institutions. [33] The regulation

section of each of the 10-Ks identifies CITB by the name “CIT Bank”. [ 29 ] Mr. Shanahan described the business of CITB during the relevant period in the following exchange with counsel: Q. What did CIT Bank do between 2003 and 2009? A. It changed over time. It was initially formed to provide financing for some of our vendor programs, particularly for the Dell program. It expanded into doing programs -- that was generated originally by our vendor finance unit. It started expanding into doing other programs that it generated with various third-party companies where it was providing financing.

Over time, it also got started getting into home equity loans. I think around 2007, it started making corporate finance loans. Q. Its customers were whom? A. Initially its customers were consumers. By 2007, it started developing into small- and medium-size businesses, and somewhere in there they also made SBA loans, which would be small businesses. Q. What about accepting deposits? A. They funded themselves with a combination of equity from the parent, loans from the parent, and deposits they accepted. Initially it was through broker deposits.

In other words, if someone went to Merrill Lynch and said, “Can you find me a bank that is going to give me a good interest rate on a certificate of deposit,” they would look around, and CIT Bank would be one of the ones they would look at. It was primarily CDs at the beginning. [34] C. CCG

(1) The Employees of CCG [ 30 ] The senior employee of CCG throughout the relevant period was its managing director. The primary role of the managing director was to oversee CCG’s portfolio and to seek out and vet opportunities for CCG consistent with CCG’s business objectives.

In addition, the managing director was responsible for the preparation of an annual “ President’s Report ” (which was tendered at the annual general meeting), managing the staff of CCG, overseeing the preparation of financial statements, tax returns and reports to the Central Bank of Barbados, and liaising with the auditors of CCG. [35] [ 31 ] During the relevant period, the managing directors of CCG were as follows: Name of Managing Director Tenure as Managing Director John Walker February 1997 to December 2006 [36] Bruce Ells November 2006 to March 2009 [37] Steven Blazevic January 2009 to July 2014 [38] [ 32 ] In addition to the managing director, CCG had six other full-time employees during the relevant period, and each employee had a distinct role to play. [39] [ 33 ] At the time of his appointment as managing director in February 1997, Mr.

Walker had nine years’ experience as an investment analyst focusing on private and public debt, which he acquired through his employment with Confederation Life in Canada and the United States. [40] Mr. Walker spent his last years at Confederation Life in the United States managing the liquidation of its assets. After leaving CCG, Mr. Walker returned to Canada, where he is currently the director of corporate finance at CITF in Calgary. [41] [ 34 ] At the time of his appointment as managing director, Mr.

Ells had relevant experience acquired over 18 years through his employment by the Export Development Corporation (now Export Development Canada), RBC Dominion Securities, Newcourt Credit Group and CITG. [42] Mr. Ells described this experience as follows: In some ways, much of what I had done in my working life until then was actually very direct preparation for that role [as managing director of CCG]. I had broad international experience both in origination and risk and treasury operations from my time at EDC.

I had worked on the bond desk in London for RBC Dominion Securities, so I had some capital markets background from the point of view of a market maker, which was actually useful for some of the capital markets transactions and administration we had to do at CCG. Then my work at Newcourt and CIT was on the risk side of those businesses, so managing the portfolio and the quality of the incoming assets and credit surveillance and addressing or understanding and characterizing for the board any underperformance by our existing financial assets.

All of that was very familiar from what by then was almost 20 years of experience in related roles. [43] [ 35 ] Mr. Ells left the CITG group of companies in March 2009. For the past two years, Mr. Ells has been the chief credit officer of rail and aviation at Element Financial Corporation, a competitor of CITG, and before that he was senior vice president, project finance at Dominion Bond Rating Service for 3 years. [44] Mr. Ells was subpoenaed by the Appellant to testify. [45] [ 36 ] At the time of his appointment as managing director, Mr. Blazevic had 12 years’ experience in lending and lease financing,

which he had obtained through his employment by TD Bank, Newcourt Financial Ltd., GE Capital and GE Fleet Services. In 2006, Mr. Blazevic left his position as VP, risk management of GE Fleet Services and took the position of assistant VP, credit at CITF, where he was responsible for the commercial and industrial financing and syndication portfolio. He remained in this position until he was appointed managing director of CCG on January 5, 2009. After leaving CCG on July 31, 2014, Mr. Blazevic was appointed director, energy and infrastructure at CITF in Toronto. [46] [ 37 ] The testimony of Mr. Walker, Mr.

Ells and Mr. Blazevic regarding CCG differed only in the specific details relating to the periods that they each served as managing director. Each painted a similar picture regarding the business objectives of CCG, the operations of CCG, the interaction of CCG with the authorities in Barbados, the role of the managing director of CCG, the role of the board of directors of CCG, and the activities of the employees of CCG. The following facts represent a composite drawn from the evidence provided by these three witnesses.

(2) The Operations of CCG (

a) General [ 38 ] The operations of CCG throughout the relevant period were conducted from its offices at Chelston Park, Collymore Rock, St.

Michael, Barbados, which was CCG’s only location. [47] The operations were overseen by CCG’s board of directors, which included a representative of the IBCs and high-profile Barbadian residents. [48] [ 39 ] The managing director would meet with the board on a regular basis and present the board with opportunities consistent with the business objectives of CCG, and the board would decide whether to pursue these opportunities. [49] The witnesses’ description of CCG’s business objectives was consistent and is well summarized by Mr. Blazevic and Mr.

Ells as follows: The business philosophy was to lend money to third-party corporations. The focus was on investment-grade transactions or loans, predominantly in the project finance, rail, and corporate finance spaces. [50] . . . CCG Trust was primarily a lender. The purpose was to optimize yield on fixed-income investments. . . .

CCG Trust was primarily a buy-and-hold shop, meaning that we invested in long-term assets, investment grade, typically investments vetted by a primary market process, and those investments were intended to be held to maturity on the expectation that they would continue to have a high credit quality. [51] [ 40 ] To enforce the long-term hold philosophy vis-à-vis the loans it originated, CCG would negotiate a “ make-whole premium ” that required the borrower to make a payment if it chose to repay its debt early.

The payment of the premium was triggered by early repayment and was intended to place CCG in the same position as it would have been in if it had held the debt to maturity. The existence of the make-whole premium removed the incentive for a borrower to repay its debt early. [52] [ 41 ] An example of the triggering of a make-whole premium occurred in 2005. In that year, a debtor prepaid a debt owed to CCG in respect of the financing of four ships. The transaction had been funded in 1997 and was otherwise scheduled to mature in 2008.

CCG received a make-whole premium as a result of the early repayment, which was made because the debtor was acquired by a new owner, who wished to prepay the debt. [ 42 ] The managing director sourced opportunities for CCG through third party agents and brokers, mainly on Wall Street. The initial contacts were developed by Mr.

Walker from individuals he had dealt with while at Confederation Life. [53] His successors continued to use those contacts and others. [54] The contacts included individuals at Deutsche Bank, Citibank, Credit Suisse, Lehman Bros., Merrill Lynch and Bank of America. [ 43 ] Each year during the relevant period the managing director prepared a President’s Report, which was presented at the annual general meeting of CCG. [55] Each report would take 5 or 6 weeks to prepare and was modelled on the prior year’s report.

The managing director would receive assistance from the other employees of CCG in preparing the report. [ 44 ] The first paragraph of the 2003 through 2007 reports stated: The business of CCG Trust Corporation (“CCG”) is the lending of money through international asset-based financings, primarily for high value transportation and industrial equipment. CCG was established in 1989 for participation by a number of large Canadian life insurance companies as an element of their extensive domestic and international investment portfolios.

Since its formation, the company has structured and provided in excess of $1 billion of debt financing. [56] [ 45 ] Each report provided details regarding the year’s activities (i.e., the 2003 report addressed activities in 2003), the composition, distribution and performance of CCG’s portfolio, including the swap transactions it had in place, the terms of each financing funded by CCG and the credit characteristics of the borrowers.

In addition, each report provided an operational overview which included a description of the staffing of CCG, the regulation of CCG, the aircraft inspection program (2003, 2004, 2005), the auditors of CCG, the board of directors, the executive committee, government relations and the Barbados economy. [ 46 ] The managing director would make a presentation at each annual general meeting of CCG. Mr. Walker described this presentation as follows: I would do almost like a state of the union, I guess, and go through the operations of the business over the previous year, what the

portfolio looked like, additions, maturities, things like that, anything they should be aware of. Just anything I felt was prudent to bring to their attention. Even looking forward, if there was anything, the Barbados economy we would talk about or if there was a rumour of a change of legislation, just anything that I felt was germane to what they needed to know. [57] (

b) The Funding of CCG [ 47 ] The business of CCG was funded entirely by loans provided by the IBCs. Specifically, CCG borrowed from the IBCs in either Canadian or U.S. dollars at varying rates of interest secured by CCG’s assets. The outstanding balance of the loans at the end of 2002 and at the end of each fiscal year in the relevant period was as follows: [58] YEAR BALANCE (Cdn $) 2002 586,799,542 2003 498,967,904 2004 429,152,116 2005 328,617,544 2006 390,911,567 2007 346,097,930 [59] 2008 369,596,019 2009 353,914,032 [ 48 ] The manner in which these loans were made to CCG was described by Mr.

Walker in cross-examination as follows: We would have made requests to the IBCs at different times for funding. They would provide that funding to CCG. CCG then had that funding, that cash within CCG. We would then with cash make an investment.

We would fund a borrower, whatever transaction we happened to be looking at at the time that was approved by the board. [60] [ 49 ] A specific IBC might choose to fund CCG so that CCG could enter in specific investment or an IBC might choose not to fund a specific investment. [61] If one or more of the IBCs funded a specific investment by CCG, the IBCs’ loan to CCG would be secured by the investment under the terms of the inter-lenders agreement among CCG and the IBCs. [62] The IBCs’ security interests in the assets of CCG were reported in a chart in the annual President’s Reports and were also reported to the Central Bank of Barbados. [63] However, CCG was the owner of the assets, not the IBCs. [64] [ 50 ] The notes to the financial statements of CCG state that the “ scheduled maturity dates of loans payable to shareholders are consistent with that of the loans receivable ”. [65] Mr.

Walker confirmed that the terms of the loans by the IBCs to CCG were “ consistent with that of the loans receivable on the loan portfolio with third parties ”. [66] (

c) CCG’s Portfolio [ 51 ] For the most part, the portfolio of CCG consisted of long-term debt obligations originated by CCG (i.e., CCG was the original creditor), or acquired by CCG in the secondary market, that related to the long-term financing of large assets such as rail cars, ships and aircraft. The make-up of the portfolio is well documented in CCG’s financial statements and in the annual President’s Reports for the relevant period. I do not see any need to describe the underlying transactions in detail. [ 52 ] There was one exception to CCG’s focus on high quality, long-term debt obligations.

In 2004, CCG acquired a credit linked note (“ CLN ”) from Deutsche Bank.

The CLN was acquired due to the low interest rate environment at the time and provided a return to CCG in exchange for credit exposure to an underlying basket of 100 individual credit default swaps. [67] The CLN was acquired in March 2004 and matured on June 20, 2009. [68] CCG did not purchase the CLN for cash but rather was liable to Deutsche Bank to the extent that there were defaults in the underlying portfolio exceeding a specified threshold. [ 53 ] CCG would typically invest surplus cash in short-term deposits until a suitable long-term investment opportunity came along.

In 2006, CCG entered into convertible asset swaps (“ CAS ”) with Deutsche Bank. The CAS were short-term debt obligations that were used by CCG to replace term deposits because of the low interest rate provided on such deposits in 2006.

The CAS involved the purchase by CCG of callable and puttable bonds with a term of 1 to 3 years and the entering into of an arrangement with Deutsche Bank that provided CCG with a premium in addition to the interest payable to CCG on the bonds. [69] [ 54 ] The low interest rate environment in 2004 to 2006 resulted in a higher proportion of short-term debt than was considered ideal for CCG. Mr.

Ells described the steps taken by CCG to move from short-term obligations back into long-term obligations as follows: When I first arrived, CCG had about $150 million of $400 million in total balance sheet was in short-term instruments and deposits. When I say short-term instruments, that includes the convertible asset swaps and includes ordinary short-term cash deposits. That was considered not an ideal circumstance in that CCG made better returns by doing long-term transactions in transportation and project assets, mainly.

Over that year, the change was deploying those short-term cash instruments into longer-term private placements. Actually, it took longer than the first year.

It was really at the end of 2007, we did a $50 million loan as part of a larger deal to Swisscom, not coincidentally based in Switzerland, and then five more transactions in 2008, and that reduced substantially the amount of so-called undeployed or short-term cash instruments replaced by these longer-term higher-yielding private placements. [70] [ 55 ] Throughout the relevant period, CCG was a party to swap transactions that were structured to ensure that CCG received fixed-

rate Canadian dollar cash flows from its portfolio, which included significant U.S.-dollar-denominated obligations. [71] Mr. Walker, Mr. Ells and Mr. Blazevic described the swap transactions as follows: . . . As I mentioned, we didn’t like to sell transactions. We liked to buy and hold them, and part of that was that we wanted fixed-rate Canadian dollar securities. A lot of the securities we would purchase, while most of them were fixed rate to begin with, they were U.S. dollar, so we entered into a swap to convert over the life of the transaction those U.S. dollar cash flows to Canadian.

We therefore built up a fairly significant swap book that I would report on, as well. [72] . . . . . . Most of the transactions were U.S. dollar denominated, so we swapped them from fixed-rate U.S. dollar financing through floating- rate U.S. dollar financing into fixed-rate Canadian. [73] . . .

Yes, the swaps were entered into to hedge any currency risk, so the primary market that CCG Trust dealt in was the U.S., so most private debt issuances were done in U.S. dollars, and we reported in Canadian dollars, so we swapped the U.S. dollar interest and principal payments to Canadian dollar interest and principal payments. [74] (

d) CCG’s Income [ 56 ] The financial statements of CCG for 2003 through 2008 show that interest income represented in excess of 96% of CCG’s total realized revenue for 2003 to 2008.

In 2009, the adoption of International Financial Reporting Standards and the restatement of the 2008 financial statements to reflect fair market value instead of amortized cost resulted in a change in the accounting presentation, but interest continued to be a very significant component of CCG’s realized revenues for 2008 and 2009. [75] [ 57 ] The interest paid by CCG to the IBCs on the loans from the IBCs would be slightly less than the interest received by CCG on its debt portfolio.

For example, in 2004, CCG’s interest income was approximately $39.7 million while its interest expense was approximately $38.9 million. [76] (

e) CCG’s Interaction with the Authorities in Barbados [ 58 ] In response to a request to admit under subsection 130(1) of the Tax Court of Canada Rules (General Procedure) (the “ Rules ”), the Respondent admitted that “[ o]n November 21, 1995, a license (‘the CCG license’) was issued to CCG Trust pursuant to

part 3 of the Financial Intermediaries Regulatory Act, 1992-13, of Barbados. ” [77] I will address the import of this licence in my review of the expert evidence tendered by the Appellant. [ 59 ] CCG paid to the Central Bank of Barbados (the “ Central Bank ”) an annual licence fee of Barbados $25,000. [78] As well, CCG filed monthly and quarterly reports with the Central Bank. [79] The monthly and quarterly reports for the Central Bank were prepared by the controller of CCG using a template provided by the Central Bank.

The managing director signed the reports. [ 60 ] In addition to the filing of reports, representatives of CCG would meet with representatives of the Central Bank, and the Central Bank performed two audits of CCG, one of which was in 2009. [80] [ 61 ] CCG also filed annual tax returns with the Barbados Department of Inland Revenue. [81] The income tax returns of CCG for the relevant period were prepared in Barbados dollars by Ernst and Young on the basis of the audited financial statements of CCG.

The managing director of CCG signed the income tax returns for the 2003, 2004, 2006, 2007, 2008 and 2009 taxation years. The return for the 2005 taxation year was signed by David Gittens, a member of the CCG board of directors, because Mr. Walker was away from Barbados at the time. [82] (

f) Other Information [ 62 ] In cross-examination, each of the three witnesses confirmed that CCG did not accept deposits, offer chequing or other types of accounts to the public, or act as a trustee, executor or fiduciary. As well, CCG did not offer insurance products or collect insurance premiums. [83] D. Expert Evidence [ 63 ] Sir Trevor Carmichael and Ms. Mahabir submitted expert reports and testified as expert witnesses. In their respective expert reports, Sir Trevor Carmichael and Ms. Mahabir provided the following opinions regarding Barbados law and the status of CCG under that law: 1.

On October 26, 1989, CCG was incorporated under the Companies Act of Barbados as CCG Equipment Limited. [84] As a company incorporated under the laws of Barbados, CCG was subject to and governed by the laws of Barbados during the relevant period. CCG was duly incorporated and validly existing throughout the relevant period. [85] These opinions were based upon, and supported by, searches by the experts of the Register of Companies in Barbados.

Each expert included in his or her expert report a copy of the certificate of incorporation of CCG and a copy of the certificates of amendment of CCG’s Articles of Incorporation, whereby its name was changed to CCG Trust Corporation and its share capital was amended. 2. On November 21, 1995, CCG was issued a licence by the Minister of Finance under

Part III of the FIRA, which entitled CCG to carry on the business of a trust and finance company in accordance with the provisions of paragraphs 24(1)( b ), (

c) and (

d) of the FIRA. [86]

3. The FIRA was replaced by the FIA effective July 1, 1997. Under

section 116 of the FIA, a company licensed under

Part III of the FIRA on July 1, 1997 was deemed from that date to be licensed under the FIA, and the provisions of the FIA applied accordingly. [87] Consequently, effective July 1, 1997, paragraphs 24(1)( b ), (

c) and (

d) of the FIRA were replaced by paragraphs 23(1)( b ), (

c) and (

d) of the FIA.

Section 22, subsection 23(1) and sections 24 and 27 of the FIA state: 22. In this Part [Part III], “licensee” means a company licensed under this Part to carry on business as a trust company, a finance company or a merchant bank or similar financial institution licensed under this Part. 23.

(1) The business of a trust company, a finance company or a merchant bank or similar financial institution is (

a) banking business; or (

b) the business of the acquisition of funds by (

i) the acceptance of deposits, (ii) the issue of shares, (iii) the grant of loans, (iv) the collection of premiums, and the investment of such funds; (

c) performing functions as trustee, administrator or executor; and (

d) the business of broker, investment analyst, investment adviser and such other business that is not specifically prohibited by the Central Bank by notice published in the Official Gazette for the purposes of this Part. . . . 24. No person other than a bank licensed under

Part II of the Offshore Banking Act shall carry on the business of a trust company, a finance company or a merchant bank without a licence issued under this Part. . . . 27.

(1) A licence issued under this Part shall show the class or classes of business to be carried on by the licensee.

(2) A licence issued under this

Part is subject to such conditions as the Minister may specify in respect of the class or classes of business to be carried on by the licensee.

(3) A licence under this Act remains valid until revoked pursuant to this Part but it is a condition of every licence that an annual fee be paid by the licensee in the amount and at the time prescribed. 4. The language of paragraphs 23(1)( b ), (

c) and (

d) of the FIA differed from the language of paragraphs 24(1)( b ), (

c) and (

d) of the FIRA only in the placement of the words “and the investment of such funds” in paragraph 23(1)(

b) of the FIA. Notwithstanding the different placement, those words continue to qualify all of the activities listed in subparagraphs 23(1)( b )(

i) to (iv) of the FIA. [88] 5. As a company licensed to carry on the business of a trust and finance company in accordance with the provisions of paragraphs 23(1)( b ), (

c) and (

d) of the FIA, [89] CCG was permitted to carry on the business of a trust company and the business of a finance company. [90] However, CCG was not required to carry on both businesses at the same time or to carry them on at all. [91] 6. The activities of CCG during the relevant period were permitted under the licence issued to CCG under

Part III of the FIA. [92] The nature and extent of the activities carried on by CCG in Barbados during the relevant period required CCG to be licensed under

Part III of the FIA. [93] CCG would have been subject to a penalty under

section 102 of the FIA if it conducted its business without the required licence. [94] 7. A licensee under

Part III of the FIA is required to pay to the Central Bank an annual licence fee of Barbados $25,000. [95] 8. During the relevant period, CCG was a trust company under the FIA because it was licensed to act in that capacity. [96] However, CCG did not fit within the generally understood meaning of trust company in the sense of “a corporate entity that was formed for the purpose of and was carrying on the business of acting as a trustee or fiduciary and providing related trust services”. [97] 9.

During the relevant period, CCG was regulated in accordance with the provisions of the FIA. [98] The Central Bank enforced the regulatory provisions in the FIA. [99] The FIA required CCG to fulfil its various obligations under threat of penalty.

These obligations included a requirement to provide monthly and quarterly reports to the Central Bank, to provide such other returns as the Central Bank might require and to publish its audited financial statements in the Official Gazette and in a daily newspaper. [100] In addition, CCG was required to appoint an auditor, [101] to seek approval for certain changes, [102] to maintain a certain level of capital [103] and to manage risk in accordance with published guidelines. [104] [ 64 ] Sir Trevor Carmichael and Ms.

Mahabir each included a copy of the licence issued to CCG with his/her expert report. [ 65 ] The copy of the licence included with the TC Report at Tab G has under the signature the title “ Minister responsible for Finance ”. As well, the certificate has a square stamp with the date “05 DEC 1995” and the inscription “ Bank Supervision Dept. ” Sir Trevor Carmichael testified that a partner in his firm had sent a request to the Central Bank by e-mail and that the copy of the licence at Tab G was enclosed with the letter received from the Central Bank in response to that query.

The letter is included with the TC Report at Tab H. The letter at Tab H is on Central Bank letterhead, is addressed to the Head, Commercial and Tax, at Sir Trevor Carmichael’s law

firm, is dated March 4, 2015 and is from Mrs. Cheryl A. Greenidge, Deputy Director, Bank Supervision Department. The letter states: We refer to your email request of March 3, 2015 and confirm that CCG Trust Corporation has been licensed since November 21, 1995under the Financial Intermediaries Regulatory Act, 1992-13, has paid its licence fees and has been regulated from said date by theCentral Bank of Barbados. [66] Sir Trevor Carmichael explained that the Bank Supervision Department is the department that oversees the licensing andongoing regulation of banks and of entities licensed under

Part III of the FIRA.[105] He stated that he knew Mrs. Greenidge personallyand that he recognized her signature from past dealings with her.[106] [67] Sir Trevor Carmichael understood the document included with the letter to be a copy “of the original certificate, of the originallicence” issued pursuant to

Part III of the FIRA to CCG on November 21, 1995.[107] Sir Trevor Carmichael provided the followingexplanation regarding the stamp: This stamp, which says received, I would have to give an explanation for that. Maybe I will take you above the stamp first. Thedocument is signed by the Minister of Finance, and that is the signature of Owen Arthur, who at that time was Minister of Finance.

The procedure is such that when a license is signed by the Minister of Finance, that license is then sent back to the Central Bank ofBarbados, and typically, on the license, the Central Bank will stamp the date that it was received, and that is what that stamp is about. Itis signed by the Minister of Finance, the signature, which I readily recognize and know.[108] [68] The copy of the certificate included with Ms. Mahabir’s report was obtained from instructing counsel.[109] Ms. Mahabirtestified that as part of her due diligence she met personally with Mrs.

Greenidge to “ascertain the extent and nature of the regulation” ofCCG.[110] Ms. Mahabir included with her report a copy of a letter to her from Mrs.

Greenidge dated March 4, 2015, which stated: We refer to our meeting held on March 2, 2015 and confirm that CCG Trust Corporation has been licensed since November 21, 1995under the Financial Intermediaries Regulatory Act, 1992-13 and has been regulated from said date by the Central Bank of Barbados.[111] [69] The Respondent takes the position that the content of the licence and of the letters received by the expert witnesses from theCentral Bank is hearsay and should be disregarded.

The Respondent does not, however, challenge the authenticity of thesedocuments.[112] [70] With respect to the licence, in my view, the authentic copy included in the expert reports and the authentic copy entered intoevidence as Exhibit A-14 is original evidence of the fact that a licence was issued to CCG by the Central Bank. The content of thedocument is not hearsay but merely evidence of the nature of the licence that was issued.

As stated in The Law of Evidence in Canada atparagraph 2.37: A document may be introduced into evidence merely to prove its existence, or to prove that it was in the possession of some person, inwhich case it is material in itself irrespective of its contents. When so introduced, it falls within the category of “things”. When adocument is introduced to prove its contents, it merits a separate classification.

Although, in many cases, a document does not differmaterially from an unsworn statement in that it is introduced as an assertion of fact under an appropriate exception to the rule thatprohibits the introduction of hearsay evidence, in other cases it has special characteristics which do not fit within any of the othercategories. It may be a photograph.

It may be evidence of a transaction as, for instance, a written contract, deed or share certificate, inwhich case it is admissible as original evidence quite apart from any exception to the hearsay rule. [Footnote omitted, emphasis added.][113] [71] In this case, Exhibit A-14 (a copy of the licence) is evidence of a transaction: the issuance of a licence to CCG. The hearsay ruleis not applicable. The evidence of both expert witnesses confirms that Exhibit A-14 is in the form issued by the Minister of Financeunder

Part III of the FIRA.[114] The Respondent concedes that such a licence was issued. [72] The content of the letters received by the experts from the Central Bank is hearsay. However, it is well established that anexpert may rely on hearsay in formulating an expert opinion. In R. v. Lavallee, Sopinka J., in concurring reasons, made the followingobservations: The resolution of the contradiction inherent in Abbey, and the answer to the criticism Abbey has drawn, is to be found in the practicaldistinction between evidence that an expert obtains and acts upon within the scope of his or her expertise (as in City of St.

John), andevidence that an expert obtains from a party to litigation touching a matter directly in issue (as in Abbey). In the former instance, an expert arrives at an opinion on the basis of forms of enquiry and practice that are accepted means of decisionwithin that expertise. A physician, for example, daily determines questions of immense importance on the basis of the observations ofcolleagues, often in the form of second- or third-hand hearsay.

For a court to accord no weight to, or to exclude, this sort of professionaljudgment, arrived at in accordance with sound medical practices, would be to ignore the strong circumstantial guarantees oftrustworthiness that surround it, and would be, in my view, contrary to the approach this Court has taken to the analysis of hearsayevidence in general, exemplified in Ares v. Venner, (SCC), [1970] S.C.R. 608. In R. v.

Jordan (1984), (BC CA), 39 C.R. (3d) 50 (B.C.C.A.), a case concerning an expert’s evaluation of the chemical composition of an alleged heroinspecimen, Anderson J.A. held, and I respectfully agree, that Abbey does not apply in such circumstances. (See also R. v. Zundel (1987), (ON CA), 56 C.R. (3d) 1 (Ont.

C.A.), at p. 52, where the court recognized an expert opinion based upon evidence “. . .of a general nature which is widely used and acknowledged as reliable by experts in that field.”) Where, however, the information upon which an expert forms his or her opinion comes from the mouth of a party to the litigation, orfrom any other source that is inherently suspect, a court ought to require independent proof of that information. The lack of such proofwill, consistent with Abbey, have a direct effect on the weight to be given to the opinion, perhaps to the vanishing point.

But it must berecognized that it will only be very rarely that an expert’s opinion is entirely based upon such information, with no independent proof of

any of it. Where an expert’s opinion is based in part upon suspect information and in part upon either admitted facts or facts sought to be proved, the matter is purely one of weight. In this respect, I agree with the statement of Wilson J. at p. 896, as applied to circumstances such as those in the present case: . . . as long as there is some admissible evidence to establish the foundation for the expert’s opinion, the trial judge cannot subsequently instruct the jury to completely ignore the testimony.

The judge must, of course, warn the jury that the more the expert relies on facts not proved in evidence the less weight the jury may attribute to the opinion. [115] [Emphasis added.] [ 73 ] The inquiries made of the Central Bank by Sir Trevor Carmichael’s partner [116] and by Ms. Mahabir fall squarely within the scope of the sort of inquiry one would expect lawyers to make in order to provide the opinions requested by the Appellant for the benefit of the Court. In City of Saint John v. Irving Oil Co.

Ltd. , [117] the Supreme Court of Canada stated the principles applicable to expert opinions based on hearsay evidence from third party sources: [118] Counsel on behalf of the City of Saint John pointed out that if the opinion of a qualified appraiser is to be excluded because it is based upon information acquired from others who have not been called to testify in the course of his investigation, then proceedings to establish the value of land would take on an endless character as each of the appraiser’s informants whose views had contributed to the ultimate formation of his opinion would have to be individually called.

To characterize the opinion evidence of a qualified appraiser as inadmissible because it is based on something that he has been told is, in my opinion, to treat the matter as if the direct facts of each of the comparable transactions which he has investigated were at issue whereas what is in truth at issue is the value of his opinion. The nature of the source upon which such an opinion is based cannot, in my view, have any effect on the admissibility of the opinion itself.

Any frailties which may be alleged concerning the information upon which the opinion was founded are in my view only relevant in assessing the weight to be attached to that opinion, and in the present case this was entirely a question for the arbitrators and not one upon which the Appeal Division could properly rest its decision. [Emphasis added.] [ 74 ] I see no reason to afford the opinions of Sir Trevor Carmichael and Ms. Mahabir less weight because the thorough due diligence performed by them necessarily includes reliance on statements by a senior official of the Central Bank that are hearsay.

The hearsay rule is in place to protect against the use of untrustworthy sources of information to establish facts without the benefit of cross- examining the source of those facts. The source of the information obtained by Sir Trevor Carmichael and Ms. Mahabir is an instrumentality of a sovereign democracy with a legal heritage rooted in the common law. I see no basis at all for finding that the source of the information is not trustworthy.

Moreover, the circumstances in which the information was obtained by the expert witnesses —due diligence queries of the Central Bank to support expert opinions provided to this Court — provide a strong circumstantial guarantee of trustworthiness. [119] [ 75 ] The Respondent tendered an affidavit to demonstrate that she had made inquiries of the Central Bank similar to those made by the expert witnesses but had been rebuffed by the Central Bank. This, the Respondent says, points to the inherent unreliability of the letters from the Central Bank included with the expert reports.

Leaving aside the evidentiary issues associated with such an affidavit, I disagree. [ 76 ] The expert witnesses testified that in the course of their law practices in Barbados they had regular contact with the Central Bank over a period of decades. No doubt they are well known to the authorities at the Central Bank, including Ms. Greenidge. As well, the experts were retained by the Appellant, which is the indirect parent of CCG.

The fact that the Central Bank was receptive to the requests of well-known senior Barbados lawyers representing the indirect parent of CCG but not to the request of a lawyer from the Canadian Department of Justice is hardly evidence that the Central Bank is an unreliable source. If anything, it establishes that the Central Bank will not hand out information regarding a licensee without some legal justification for doing so. Ironically, if the Central Bank had responded to the request made by the Department of Justice, I have no doubt that the question of whether CCG was licensed under

Part III of the FIA during the relevant period would have been answered in the same manner as it was in the contested letters. [ 77 ] I say this because I have heard the credible and uncontradicted testimony of three witnesses for the Appellant, supported by contemporaneous documentary evidence, that indicates that on November 21, 1995, CCG was issued a licence under

Part III of the FIRA (a fact that the Respondent has admitted), that CCG paid an annual licence fee of Barbados $25,000 to the Central Bank to maintain that licence (a requirement confirmed by both expert witnesses), that CCG prepared and submitted detailed monthly and quarterly reports to the Central Bank, that representatives of CCG met with representatives of the Central Bank on a regular basis and that CCG was subjected to two audits by the Central Bank. While much of this evidence may be circumstantial, collectively it establishes to my satisfaction that CCG was licensed under

Part III of the FIRA in 1995 and continued to be licensed under

Part III of the FIA throughout the relevant period. Accordingly, I have concluded that the facts stated in the hearsay evidence relied upon by the expert witnesses have been independently proven through the testimony of the witnesses for the Appellant. III. The Statutory Provisions [ 78 ] The statutory provisions that I have considered in these appeals are as follows:

section 91 of the ITA; the

definitions of “ active business ”, “ controlled foreign affiliate ”, “ foreign accrual property income ”, “ foreign accrual tax ”, “ foreign affiliate ”, “ foreign bank ”, “ income from an active business ”, “ income from property ”, “ investmen t business ”, “ investment property ”, “ lending of money ”, “ participating percentage ”, “ permanent establishment ”, “ relevant tax factor ” and “ trust company ” in subsection 95(1) of the ITA; clause 95(2)( a )(ii)(

B) of the ITA; paragraph 95(2)(

l) of the ITA; subsection 95(2.4); the definition of “ specified deposit ” in subsection 95(2.5) of the ITA; the definition of “ lending asset ” in subsection 248(1) of the ITA; and the definition of “ foreign bank ” in

section 2 of the Bank Act . [120] These provisions as they read during the relevant period are set out in Appendix B of these reasons.

IV. The Positions of the Parties A. The Position of the Appellant [ 79 ] The Appellant submits that paragraph 95(2)(

l) does not apply to require CCG to include in computing its income from property the income of CCG earned during the relevant period. The Appellant proffers two reasons why this is the case. [ 80 ] First, in order for the income of CCG to be included in computing its income from property by the words of paragraph 95(2)(

l) that precede subparagraph 95(2)( l )(i) (I will refer to this part of paragraph 95(2)(

l) as the “

preamble ”), the principal purpose of the business of CCG during the relevant period must have been to “ derive income from trading or dealing in indebtedness ”. The Appellant submits that the principal purpose of the business of CCG during the relevant period was not to “ derive income from trading or dealing in indebtedness ” and that the parenthetical phrase “ which for the purpose of this paragraph includes the earning of interest on indebtedness ” does not alter that fact. In particular, the parenthetical phrase does not expand the meaning of “ trading or dealing in indebtedness ”.

Rather, the parenthetical phrase merely refers to an activity that is adjunct to trading or dealing in indebtedness – the earning of interest on indebtedness while the indebtedness is the object of trading or dealing. The phrase expands or confirms the type of income from the business of trading or dealing in indebtedness that is included in income from property, but it does not modify the word “ business ” or expand the meaning of the words “ trading or dealing in indebtedness ”. [ 81 ] Second, even if the business of CCG is caught by the

preamble, CCG meets the requirements of subparagraph 95(2)( l )(iii) and, as conceded by the Respondent, the Appellant meets the requirements of subparagraph 95(2)( l )(iv). Consequently, CCG’s income earned during the relevant period is not included in computing its income from property by paragraph 95(2)(

l) because of the exception created by subparagraphs 95(2)( l )(iii) and (iv). B. The Position of the Respondent [ 82 ] The Respondent submits that the business of CCG during the relevant period is described in the

preamble and does not satisfy the requirements of subparagraph 95(2)( l )(iii). Consequently, the income of CCG earned during the relevant period must be included in computing CCG’s income from property for the purposes of Subdivision i of Division B of

Part I of the ITA. Because the income of CCG during the relevant period is income from property, the interest paid by CCG to the IBCs during the relevant period is not deductible by CCG in computing the amounts prescribed to be its earnings or loss for a taxation year from an active business carried on outside Canada and, therefore, subparagraph 95(2)( a )(ii) of the ITA does not apply to deem the interest paid by CCG to the IBCs to be income of the IBCs from an active business.

Instead, the interest received by the IBCs is income from property of the IBCs which is included in the FAPI of the IBCs under A of the formula found in the definition of FAPI (I will refer to the formula in the definition of FAPI as the “ FAPI Formula ”). [121] Under subsection 91(1), the Appellant is required to include in its income, as income from its shares in the IBCs, the FAPI of CCG and the IBCs. [122] [ 83 ] The Respondent agrees that the Appellant is entitled to a deduction from income under subsection 91(4) equal to the portion of the foreign accrual tax paid by CCG and the IBCs that is attributable to the amount included in the Appellant’s income under subsection 91(1) multiplied by the relevant tax factor.

The Respondent concedes that because of a retroactive statutory amendment the Reassessments did not reflect the correct relevant tax factor for each of the Taxation Years and that the Appellant should be reassessed to apply the correct relevant tax factor. [ 84 ] In addition to the foregoing arguments, the Respondent also suggested that the overall structure was a “ conduit ” to transfer the income of CCG to the partners of CCG LP and that this should be taken into account in interpreting paragraph 95(2)( l ). V. Analysis A.

Overview of the Relevant Statutory Provisions [ 85 ] Under the ITA, taxpayers resident in Canada are subject to income tax on their world-wide income. The foreign affiliate regime in Subdivision i of Division B of

Part I of the ITA (the “ FA regime ”) addresses the taxation of outbound investment by Canadian resident taxpayers made through one or more non-resident corporations. [123] [ 86 ] In general terms, the FA regime applies to a non-resident corporation if that corporation is a foreign affiliate (an “ FA ”) of a taxpayer resident in Canada.

A non-resident corporation is an FA of such a taxpayer if the taxpayer’s direct and indirect ownership of the non-resident corporation reaches a specified level. [124] If an FA of a taxpayer is also a CFA of the taxpayer, then a subset of the FA regime, generally referred to as the FAPI regime, also applies to the FA. [125] The Appellant admits that CCG and each of the IBCs is a CFA of the Appellant. [ 87 ] The FAPI regime is intended to ensure that Canadian resident taxpayers pay tax on certain income earned through one or more non-resident corporations when it is earned rather than when it is distributed to Canada.

This avoids the deferral of the Canadian income tax liability that would result if the income was earned directly by a person resident in Canada. [ 88 ] A taxpayer resident in Canada that directly owns a share in a CFA is required to include in income for a taxation year, as income from the share, the proportion of the FAPI of each CFA of the taxpayer that is represented by the share [126] for each taxation year of the CFA ending in the taxpayer’s taxation year, whether or not any of that income is actually distributed to the taxpayer in that year.

This is in contrast to the “ basic ” FA regime, which in general terms taxes the income of foreign affiliates of Canadian resident taxpayers only when that income is actually distributed to Canada.

[ 89 ] The sources of the income included in FAPI are described in the definition of FAPI in subsection 95(1). Although it is sometimes said that the FAPI regime taxes “ passive income ”, it is not that simple, and one must carefully consider the definition of FAPI and the various other

definitions and rules that bear upon that definition. [ 90 ] One source of income included in A of the FAPI Formula is “ income(

s) for the year from property ”. [127] During the relevant period, “ income from property ” was defined in subsection 95(1) as follows: 2003 to 2008 “income from property” of a foreign affiliate of a taxpayer for a taxation year includes its income for the year from an investment business and its income for the year from an adventure or concern in the nature of trade, but, for greater certainty, does not include its income for the year that is because of subsection (2) included in its income from an active business or in its income from a business other than an active business; 2009 “income from property” of a foreign affiliate of a taxpayer for a taxation year includes the foreign affiliate’s income for the taxation year from an investment business and the foreign affiliate’s income for the taxation year from an adventure or concern in the nature of trade, but does not include (

a) the foreign affiliate’s income for the taxation year from a business that is deemed by subsection (2) to be a business other than an active business of the foreign affiliate, or (

b) the foreign affiliate’s income for the taxation year that pertains to or is incident to (

i) an active business of the foreign affiliate, or (ii) a non-qualifying business of the foreign affiliate. [ 91 ] The definition of “ income from property ” expands the usual meaning of that phrase to include income from an “ investment business ”, as defined in subsection 95(1), and income from an adventure or concern in the nature of trade. For 2003 to 2008, the definition excludes any amount included by subsection 95(2) in an FA’s income from an active business or income from a business other than an active business. [128] For 2009, the exclusionary portion of the definition was amended to read as set out in paragraphs (

a) and (b). [ 92 ] Where its conditions for application are satisfied, paragraph 95(2)(

l) includes in an FA’s income from property income that would otherwise be income from a business of the FA that is not an investment business of the FA. The issue in these appeals is whether, during the relevant period, CCG’s income from its business was to be included in the computation of its income from property under paragraph 95(2)( l ). [ 93 ] The portions of paragraph 95(2)(

l) most relevant to these appeals state: 95(2)(

l) in computing the income from property for a taxation year of a foreign affiliate of a taxpayer there shall be included the income of the affiliate for the year from a business (other than an investment business of the affiliate) the principal purpose of which is to derive income from trading or dealing in indebtedness (which for the purpose of this paragraph includes the earning of interest on indebtedness) other than (

i) indebtedness . . . (ii) trade accounts receivable . . . unless (iii) the business is carried on by the affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated under the laws (

A) of each country in which the business is carried on through a permanent establishment in that country and of the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued, (

B) of the country . . . or (C) . . . of the country . . . [ 94 ] Both the definition of “ income from property ” and paragraph 95(2)(

l) refer to income from an “ investment business ”. Income from an investment business is included in “ income from property ” and, because of this, that same income is excluded from the application of the deeming rule in paragraph 95(2)( l ), presumably to avoid the possibility of double counting. [ 95 ] The Appellant and the Respondent did not plead, argue or otherwise suggest that the business of CCG during the relevant period was an investment business . Accordingly, this analysis is premised on the business of CCG during the relevant period not being an investment business.

However, the definition of investment business is still relevant to a contextual analysis of paragraph 95(2)( l ). [ 96 ] For the relevant period, the portions of the definition of “ investment business ” in subsection 95(1) relevant to these appeals stated:

2003 to 2008 “investment business” of a foreign affiliate of a taxpayer means a business carried on by the affiliate in a taxation year (other than abusiness deemed by subsection (2) to be a business other than an active business carried on by the affiliate) the principal purpose ofwhich is to derive income from property (including interest, dividends, rents, royalties or any similar returns or substitutes therefor),income from the insurance or reinsurance of risks, income from the factoring of trade accounts receivable, or profits from the dispositionof investment property, unless it is established by the taxpayer or the affiliate that, throughout the period in the year during which thebusiness was carried on by the affiliate, (

a) the business (other than any business conducted principally with persons with whom the affiliate does not deal at arm’s length) is (

i) a business carried on by it as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securitiesor commodities, the activities of which are regulated under the laws (

A) of each country in which the business is carried on through a permanent establishment in that country and of the country under whoselaws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or waslast continued, . . . . . . or (ii) the development of real estate for sale, the lending of money, the leasing or licensing of property or the insurance or reinsurance ofrisks . . . [129] [97] The 2009 version of the definition of “investment business” is virtually the same except that it adds the phrase “and other than anon-qualifying business of the foreign affiliate” to the first parenthetical phrase in the

preamble to the definition. [98] The phrase “lending of money” is defined expansively in subsection 95(1) to include, among other things, the acquisition ofaccounts receivable owed by arm’s length persons and the acquisition or sale of loans or lending assets owed by arm’s length persons.“Lending asset” is defined in subsection 248(1) to mean “a bond, debenture, mortgage, hypothecary claim, note, agreement of sale or anyother indebtedness or a prescribed share, but does not include a prescribed property”.

Accordingly, the reference to the “lending ofmoney” in subparagraph (a)(ii) of the definition of “investment business” includes acquiring and/or selling indebtedness owed by arm’slength persons. [99] A final piece of the puzzle is paragraph 95(2)(a). Where certain conditions are satisfied that paragraph includes in an FA’sincome from an active business certain income that would otherwise be income from property.

The IBCs relied on clause 95(2)(a)(ii)(B)to include in their respective incomes from an active business the interest paid or payable to them by CCG. [100] One requirement for the application of clause 95(2)(a)(ii)(

B) is that the interest paid or payable by CCG to the IBCs must bedeductible by CCG “in computing the amounts prescribed to be its earnings or loss for a taxation year from an active business (other thanan active business carried on in Canada)”. If CCG’s income from its business is included in computing CCG’s “income from property”because of paragraph 95(2)(l), then the interest paid by CCG to the IBCs does not meet this requirement as it would be deducted incomputing CCG’s income from property rather than its income from an active business.

Accordingly, the IBCs would have income fromproperty equal to the interest received from CCG, which is included in the FAPI of the IBCs by virtue of A in the FAPI Formula. B. The

Interpretation of Paragraph 95(2)(l) [101] In interpreting paragraph 95(2)(l), I must apply the principles of statutory

interpretation sanctioned by the Supreme Court ofCanada. In Canada Trustco Mortgage Co. v. Canada,[130] the Supreme Court stated: 10 It has been long established as a matter of statutory

interpretation that “the words of

an Act are to be read in their entire contextand in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention ofParliament”: see 65302 British Columbia Ltd. v. Canada, (SCC), [1999] 3 S.C.R. 804, at para. 50. The

interpretation ofa statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious withthe Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play[s] a dominantrole in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinarymeaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process mayvary, but in all cases the court must seek to read the provisions of

an Act as a harmonious whole. [102] In Lehigh Cement Limited v. The Queen,[131] Stratas J.A. of the Federal Court of Appeal reproduced the above paragraph andthen stated: [39] The provisions in taxation statutes are often detailed and particular. The Income Tax Act is “an instrument dominated by explicitprovisions dictating specific consequences,” and this invites “a largely textual

interpretation”: Canada Trustco, at paragraph 13. [40] As a result, “[w]here Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it isreasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe”: CanadaTrustco, supra at paragraph 11. Where the provision at issue is “clear and unambiguous,” its words “must simply be applied”: ShellCanada Ltd. v. Canada, (SCC), [1999] 3 S.C.R. 622 at paragraph 40.

In such circumstances, a supposed purpose“cannot be used to create an unexpressed exception to clear language” or “supplant” clear language: Placer Dome Canada Ltd. v.Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715 at paragraph 23, citing P. W. Hogg, J. E. Magee and J. Li, Principlesof Canadian Income Tax Law (5th ed. 2005), at page 569.

… [44] Overall, though, our task is to discern the meaning of the provision’s text using all of the objective clues available to us. [ 103 ] In addition to these principles, it is helpful in this case to review some of the basic premises that must be kept in mind when interpreting statutes. In Sullivan on the Construction of Statutes , Professor Sullivan states: By well established convention, legislation is drafted in a formal, impersonal style. Legislative prose strives to be spare, non-emotive and unforegrounded.

It values uniformity and consistency over stylistic variation and straightforward expression over aesthetic appeal; a legislative drafter never indulges his or her sense of humour. Legislative style tends to be monotonous due to an unusually heavy reliance on repetition and parallel structures. The first obligation of a drafter is to be accurate; the second is to be clear; the third is to be concise. There is no obligation to inspire or entertain. [132] [ 104 ] In Statutory

Interpretation , Professor Sullivan summarizes the presumptions associated with legislative drafting at pages 168 to 169: In analyzing legislative texts, interpreters draw not only on the ordinary conventions of language and common sense but also on the presumptions about legislative drafting described above: • the legislature has flawless linguistic competence and encyclopedic knowledge; • it has an intelligible goal and a rational plan; • its choice of words, word order, and structure and its sequencing of material are careful and orderly, with an accurate appreciation of the impact on meaning; • it uses a direct, straightforward style, avoiding rhetorical devices and relying on fixed patterns and pattern variations; and • every feature of the text is there for a reason and has its own work to do. [133] [ 105 ] Cognizant of these principles and presumptions, I will break the analysis of paragraph 95(2)(

l) into two parts, each addressing one of the Appellant’s two main positions. In each case, I will perform a textual, contextual and purposive analysis of the relevant statutory language, keeping in mind that context and purpose play a lesser role when the words are precise and unequivocal. [ 106 ] The words most relevant to the analysis of the Appellant’s first position are those in the

preamble and immediately following the

preamble: in computing the income from property for a taxation year of a foreign affiliate of a taxpayer there shall be included the income of the affiliate for the year from a business (other than an investment business of the affiliate) the principal purpose of which is to derive income from trading or dealing in indebtedness (which for the purpose of this paragraph includes the earning of interest on indebtedness) other than (

i) indebtedness . . . (ii) trade accounts receivable . . . [ 107 ] The Appellant and Respondent each present a different

interpretation of the

preamble. The Appellant submits that the parenthetical phrase at the end of the

preamble - “ which for the purpose of this paragraph includes the earning of interest on indebtedness ” (the “ parenthetical ”) - merely clarifies that, in determining what income is included in computing income from property, it is necessary to include as part of the income from the FA’s business, the principal purpose of which is “ to derive income from trading or dealing in indebtedness ”, interest on the indebtedness that is the object of the trading or dealing. [134] [ 108 ] The Respondent submits that the parenthetical expands the meaning of the phrase “ trading or dealing in indebtedness ” to include the earning of interest on any indebtedness. As a result of this, the

preamble requires a determination of whether the principal purpose of CCG’s business was to derive income from “ trading or dealing in indebtedness ”, assuming this activity includes within its scope the earning of interest on any indebtedness. For the reasons that follow, I prefer the Respondent’s

interpretation of the

preamble. [ 109 ] I will start by considering the construction of the

preamble. To this end, it is helpful to break down the

preamble into six parts, as follows: (1)[in computing the income from property for a taxation year of a foreign affiliate of a taxpayer] (2)[there shall be included the income of the affiliate for the year from a business] (3)[(other than an investment business of the affiliate)] (4)[the principal purpose of which is to derive income from trading or dealing in indebtedness] (5)[(which for the purpose of this paragraph includes the earning of interest on indebtedness)] (6)[other than (

i) indebtedness . . . (ii) trade accounts receivable . . . ] [ 110 ] In my view, the role of five of these constituent parts is clear and unambiguous: 1. These words describe what paragraph 95(2)(

l) relates to — the computation of an FA’s income from property for a taxation year. 2. These words describe what is to be included in computing the FAs income from property — the income of the FA from a business.

3. These words describe the business referred to in 2 — the business does not include an investment business. 4. These words describe the business referred to in 2 — the business must have a principal purpose as described. 5. To be determined. 6. These words describe the business referred to in 2 — the principal purpose of the business is to be determined without regard to the types of indebtedness described in subparagraphs 95(2)( l )(

i) and (ii). [ 111 ] The positions of the Appellant and the Respondent raise the question of whether the parenthetical is, as its position in the paragraph suggests, part of the description of the business of the FA caught by the

preamble or part of the description of the income from the business that is to be included in computing the income from property of the FA. [ 112 ] To help in a textual

interpretation of the parenthetical, the words can be pared down as follows: [135] a business . . . the principal purpose of which is to derive income from trading or dealing in indebtedness (which for the purpose of this paragraph includes the earning of interest on indebtedness) other than (

i) indebtedness . . . (ii) trade accounts receivable . . . [ 113 ] These words describe the type of business by reference to its “ principal purpose ”. The “ principal purpose ” is identified with the business by the words “ of which ”. The verb structure of the clause — “ is to derive ” — expresses a requirement.

The words after the verb phrase “ is to derive ” provide the description necessary to determine whether the principal purpose requirement is met. [ 114 ] The words after the parenthetical qualify the last word before the parenthetical — “ indebtedness ” — and describe two types of indebtedness that do not count in the determination of whether the principal purpose requirement is met. Although not reproduced in the shortened version above, the words after subparagraph 95(2)( l )(ii) introduce an exception for a business that is otherwise caught by the

preamble. [ 115 ] The parenthetical itself starts with the word “ which ”. This identifies the parenthetical as a relative (or adjectival) clause. As such, the usual role of the parenthetical would be to modify a preceding noun or noun phrase. [ 116 ] The first noun preceding the parenthetical is “ indebtedness ”.

Relating the parenthetical back to this word alone would result in the nonsensical meaning “ indebtedness . . . includes the earning of interest on indebtedness ”, which I conclude was not the meaning intended by Parliament. [ 117 ] The group of words “ trading or dealing in indebtedness ” is a noun phrase composed of two gerunds (“ trading ” and “ dealing ”) and a prepositional phrase (“ in indebtedness ”). Collectively, they describe an activity as opposed to an action. [136] Syntactically, it is reasonable to assume that the parenthetical is qualifying this noun phrase.

This conclusion is supported by the fact that the structure of the parenthetical is parallel to the noun phrase. Specifically, “ trading or dealing in indebtedness ” is parallel to “ the earning of interest on indebtedness ”. The construction is careful and precise, as is to be expected of legislative drafting. [ 118 ] There is a larger noun phrase preceding the parenthetical: “ income from trading or dealing in indebtedness ”.

Referring the parenthetical back to this larger phrase would convey the meaning of “ income from trading or dealing in indebtedness . . . includes the earning of interest on indebtedness ”. The structures are not parallel and the apparent meaning makes considerably less sense than is the case if the parenthetical qualifies “ trading or dealing in indebtedness ”. [ 119 ] However, even if that

interpretation were to be adopted, it does not assist the Appellant unless I also find that the reference to “ indebtedness ” in the parenthetical is a reference to the indebtedness that is the object of the trading or dealing. Apart from syntax, the text simply does not support such a construction without adding a word such as “ the ” or “ that ” before “ indebtedness ” in the parenthetical. It is not appropriate to read in such a word if the text supports a reasonable

interpretation without the addition of the word. [ 120 ] There are other clues in the text that support the view that the parenthetical modifies the phrase “ trading or dealing in indebtedness ”. For example, if paragraph 95(2)(

l) applies to a business of an FA, the words in the first two parts of the

preamble clearly state that all of the income from that business is included in computing the FA’s income from property. Hence, to the extent that the FA is conducting a business that meets the principal purpose requirement, all income from that business is recast as income from property. Given that, it is hard to see why it would be necessary for Parliament to state at the very end of the

preamble that for the purposes of this inclusion the income of the FA from trading or dealing in indebtedness includes interest on the indebtedness that is the object of the trading or dealing. Under general principles any such income would be from that same business source. [137] [ 121 ] If, as the Appellant suggests, Parliament had intended to qualify what is included in the income being earned from a business that meets the principal purpose requirement, then it could easily have made that clear. In that regard, the Respondent points to the language in subparagraph 95(2.4)( b )(

i) as evidence of an approach that would unambiguously make the point: (

i) th

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