HUSKY ENERGY INC., Appellant, v. HIS MAJESTY THE KING,, 2023 TCC 167

Docket: 2017-1252(IT)G BETWEEN: HUSKY ENERGY INC., Appellant, and HIS MAJESTY THE KING, Respondent . Appeal heard on common evidence with the appeals of Hutchison Whampoa Luxembourg Holdings S.À.R.L. (2017-3776(IT)

G) and L.F. Management and Investment S.A.R.L. (2018-388(IT)

G) on January 9 to 12, 2023, January 16 to 19, 2023, and January 23 and 26, 2023, at Toronto, Ontario And further submissions received on July 7, 2023 from the Appellants and on July 31, 2023 from the Respondent Before: The Honourable Justice John R. Owen Appearances : Counsel for the Appellant: Nicolas X.

Cloutier Dominic Bédard-Lapointe Robert Celac Counsel for the Respondent: Pascal Tétrault Montano Cabezas David McLeod JUDGMENT UPON hearing the evidence and submissions of counsel for the Appellants and counsel for the Respondent; IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the assessment of Husky Energy Inc. ( " “Husky” " ) by notice dated January 15, 2015 is dismissed with costs to the Respondent. The parties have 60 days to agree on costs.

If no agreement is reached by Husky and the Respondent, the Respondent has a further 30 days to provide written submissions on costs not to exceed 10 pages and Husky has a further 30 days to provide written submissions in response to the submissions of the Respondent not to exceed 10 pages. Signed at Ottawa, Canada, this 13 th day of December 2023. “J.R. Owen” Owen J. Docket: 2017-3776(IT)G BETWEEN: HUTCHISON WHAMPOA LUXEMBOURG HOLDINGS S.À.R.L., Appellant,

and HIS MAJESTY THE KING, Respondent. Appeal heard on common evidence with the appeals of Husky Energy Inc. (2017-1252(IT)

G) and L.F. Management and Investment S.A.R.L. (2018-388(IT)

G) on January 9 to 12, 2023, January 16 to 19, 2023, and January 23 and 26, 2023, at Toronto, Ontario And further submissions received on July 7, 2023 from the Appellants and on July 31, 2023 from the Respondent Before: The Honourable Justice John R.

Owen Appearances : Counsel for the Appellant: Margaret Nixon Pierre-Louis Le Saunier Zev Smith Counsel for the Respondent: Pascal Tétrault Montano Cabezas David McLeod JUDGMENT UPON hearing the evidence and submissions of counsel for the Appellants and counsel for the Respondent; IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the assessment of Hutchison Whampoa Luxembourg Holdings S.à.r.l. ( " “HWLH” " ) by notice dated August 1, 2016 is allowed with costs to HWLH, and the assessment is vacated. The parties have 60 days to agree on costs.

If no agreement is reached by HWLH and the Respondent, HWLH has a further 30 days to provide written submissions on costs not to exceed 10 pages and the Respondent has a further 30 days to provide written submissions in response to the submissions of HWLH not to exceed 10 pages. Signed at Ottawa, Canada, this 13 th day of December 2023. “J.R. Owen” Owen J. Docket: 2018-388(IT)G BETWEEN: L.F. MANAGEMENT AND INVESTMENT S.A.R.L., Appellant, and HIS MAJESTY THE KING, Respondent. Appeal heard on common evidence with the appeals of Husky Energy Inc. (2017-1252(IT)

G) and Hutchison Whampoa Luxembourg Holdings S.À.R.L. (2017-3776(IT)

G) on

January 9 to 12, 2023, January 16 to 19, 2023, and January 23 and 26, 2023, at Toronto, Ontario And further submissions received on July 7, 2023 from the Appellants and on July 31, 2023 from the Respondent Before: The Honourable Justice John R. Owen Appearances : Counsel for the Appellant: Louise R. Summerhill Josh Kumar Monica Carinci Counsel for the Respondent: Pascal Tétrault Montano Cabezas David McLeod JUDGMENT UPON hearing the evidence and submissions of counsel for the Appellants and counsel for the Respondent; IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the assessment of L.F.

Management and Investment S.a.r.l. ( " “LFMI” " ) by notice dated August 1, 2016 is allowed with costs to LFMI and the assessment is vacated. The parties have 60 days to agree on costs. If no agreement is reached by LFMI and the Respondent, LFMI has a further 30 days to provide written submissions on costs not to exceed 10 pages and the Respondent has a further 30 days to provide written submissions in response to the submissions of LFMI not to exceed 10 pages. Signed at Ottawa, Canada, this 13 th day of December 2023. “J.R. Owen” Owen J.

Citation: 2023 TCC 167 Date: 20231213 Docket: 2017-1252(IT)G BETWEEN: HUSKY ENERGY INC., Appellant, and HIS MAJESTY THE KING, Respondent; Docket: 2017-3776(IT)G AND BETWEEN: HUTCHISON WHAMPOA LUXEMBOURG HOLDINGS S. À.R.L. , Appellant, and

HIS MAJESTY THE KING, Respondent; Docket: 2018-388(IT)G AND BETWEEN: L.F. MANAGEMENT AND INVESTMENT S.A.R.L., Appellant, and HIS MAJESTY THE KING, Respondent. REASONS FOR JUDGMENT Owen J. I. Overview [ 1 ] Husky Energy Inc. ( " “Husky” " ), Hutchison Whampoa Luxembourg Holdings S. à .r.l. ( " “HWLH” " ) and L.F.

Management and Investment S. a .r.l. ( " “LFMI” " ) (individually, an " “Appellant” " and, collectively, the " “Appellants” " ) each appeals an assessment by the Minister of National Revenue (the " “Minister” " ) that fixes the tax consequences to the Appellant in respect of dividends paid by Husky to two non-resident persons on October 1, 2003.

I will refer to the assessments of Husky, HWLH and LFMI as the " “ Husky Assessment” " , the " “ HWLH Assessment” " and the " “LFMI Assessment " " ” " , respectively. [1] [ 2 ] On October 1, 2003, Husky paid a quarterly dividend of $0.10 (the " “Second Quarter Dividend” " ) and a special dividend of $1.00 (the " “Special Dividend” " ) on each of its common shares outstanding at that time.

I will refer to the Second Quarter Dividend and the Special Dividend collectively as the " “Husky Dividends” " . [ 3 ] Husky paid $328,986,960 of the Husky Dividends (the " “Dividends” " ) to two non-resident corporations that, on August 29, 2003, were listed in the register of common shareholders of Husky maintained by Computershare. [ 4 ] One of the two payee corporations, Hutchison Whampoa Europe Investments S. à .r.l. ( " “HWEI” " ), had borrowed 146,548,737 common shares in Husky under the terms of a securities lending agreement with a predecessor of HWLH called U.F.

Investments (Barbados) Limited ( " “UF Barbados” " ). HWEI was paid $161,203,610 of the Dividends (the " “HWEI Dividends” " ) less $8,060,180.50 withheld by Husky and therefore received $153,143,429.50. [ 5 ] The second of the two payee corporations, L.F. Luxembourg S.à.r.l. ( " “ LF Luxembourg ” " ), had borrowed a total of 152,530,319 common shares in Husky under the terms of securities lending agreements with two predecessors of LFMI called L.F. Investments (Barbados) Limited ( " “LF Barbados” " ) and H.F. Investments (Barbados) Ltd. ( " “HF Barbados” " ).

LF Luxembourg borrowed 137,576,366 common shares of Husky from LF Barbados and 14,953,953 common shares of Husky from HF Barbados. LF Luxembourg was paid $167,783,350 of the Dividends (the " “LF Luxembourg Dividends” " ) less $8,389,167.50 withheld by Husky and therefore received $159,394,182.50. [2] [ 6 ] On September 25, 2003, LF Barbados and HF Barbados amalgamated with a third corporation, LFCB Holdings Ltd., to form L.F. Investments (Barbados) Limited ( " “New LF Barbados” " ).

Consequently, at the time that the Dividends were paid by Husky, New LF Barbados was the lender under the securities lending agreement with LF Luxembourg. [ 7 ] The parties agree that in 2003, UF Barbados, LF Barbados, HF Barbados and New LF Barbados were resident in Barbados for the purposes of the Canada–Barbados Income Tax Convention (the " “Barbados Treaty” " ). The parties also agree that in 2003, HWEI and LF Luxembourg (collectively, the " “Luxcos” " ) were resident in Luxembourg for the purposes of the Canada–Luxembourg Income Tax Convention (the " “ Luxembourg Treaty ” " ).

There is no evidence that contradicts these concessions. [3] [ 8 ] The Minister’s position is that tax under

Part XIII of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp .)(the " “ ITA ” " ) was exigible on the Dividends at the rate of 15%, which is the rate under

Article X(2) of the Barbados Treaty ( " “Article X(2)” " ). [4] Husky withheld and remitted tax under

Part XIII at the rate of 5%, which is the lower of the two rates provided under Article 10(2) of the Luxembourg Treaty ( " “Article 10(2)” " ). I will refer to the difference in the amount of

Part XIII tax levied on the Dividends at the rates of 15% and 5% as the " “shortfall” " . [ 9 ] In support of the Husky Assessment, the Minister submits that: 1. UF Barbados and New LF Barbados, not HWEI and LF Luxembourg , were the beneficial owners of the Dividends. Therefore, the tax rate applicable to the Dividends was the 15% rate under

Article X(2) and Husky was required to withhold and remit tax at that rate.

2. If HWEI and LF Luxembourg were the beneficial owners of the Dividends, neither controlled directly or indirectly at least 10% of thevoting power in Husky. Therefore, the applicable rate under Article 10(2) was 15% rather than 5% and Husky was required to withhold andremit tax under

Part XIII of the ITA at the 15% rate. 3. In the alternative, under the general-anti avoidance rule in

section 245 of the ITA (the "“GAAR”"), the Minister is entitled to assessHusky for the shortfall. [10] In support of the HWLH Assessment and the LFMI Assessment, the Minister submits that: 1. UF Barbados and New LF Barbados, not HWEI and LF Luxembourg, were the beneficial owners of the Dividends. Therefore, the taxrate applicable to the Dividends was the 15% rate under

Article X(2) and HWLH and LFMI, as the successors of UF Barbados and New LFBarbados, respectively, is each liable for its respective share of the shortfall. 2. In the alternative, under the GAAR, the Minister is entitled to assess each of HWLH and LFMI, as the successors of UF Barbados andNew LF Barbados, respectively, for its share of the shortfall. II.

The Partial Agreed Statement of Facts and the Joint Book ofDocuments [11] The parties submitted a partial agreed statement of facts (the "“PASF”"), the contents of which are appended to these reasons asAppendix "“A”", and two volumes of the documents referenced in the PASF. The basis on which the documents referenced in the PASF areentered into evidence is described in the "“Preliminary Matters”"

section of the PASF. [12] In addition, the parties submitted a joint book of documents in two volumes (the "“Joint Book”"). The basis on which the documentsincluded in the Joint Book are entered into evidence is described in a documents agreement included at the beginning of the Joint Book.[5] III. The Evidence A. General [13] The appeals were heard on common evidence. B. The Witnesses [14] The Appellants called six witnesses: 1. Martin John Gardiner Glynn. In 2003, Mr. Glynn was a member of the board of directors of Husky and was chairman of the auditcommittee of Husky. 2. Neil Douglas McGee. In 2003, Mr.

McGee was a vice-president and the chief financial officer of Husky. 3. Donald Jeffrey Roberts. In 2003, Mr. Roberts was the group deputy chief financial officer of Hutchison Whampoa Limited ("“HWL”")in Hong Kong. 4. Wai Ying Fung. In 2003, Mr. Fung was group chief accountant of HWL in Hong Kong. 5. Kenneth Albert Cameron. Mr. Cameron was an auditor with the Canada Revenue Agency (the "“CRA”") who participated in the audit ofthe Appellants. Mr. Cameron was subpoenaed to testify by the Appellants. 6. Laurie Marie Wills. Ms. Wills was an auditor with the CRA who participated in the audit of the Appellants. Ms.

Wills was subpoenaed totestify by the Appellants. [15] The Respondent called two witnesses, one of whom was qualified as an expert witness: 1. Bing Zhang. Mr. Zhang is an exchange of information officer with the Competent Authority Exchange of Information division of theCRA. 2. Werner Haslehner. Professor Haslehner testified as an expert in Luxembourg tax law. C. The Credibility and Reliability of the Witnesses [16] The credibility of a witness refers to the honesty of the witness, or the readiness of the witness to tell the truth.

A finding that a witnessis not credible is a finding that the evidence of the witness cannot be trusted because the witness is deliberately not telling the truth. [17] The reliability of a witness refers to the ability of the witness to recount facts accurately. If a witness is credible, reliability addressesthe kinds of things that can cause even an honest witness to be mistaken. A finding that the evidence of a witness is not reliable goes to theweight to be accorded to that evidence. [18] Reliability may be affected by any number of factors, including the passage of time. In R. v. Norman, (ON CA),[1993] O.J.

No. 2802 (QL), 68 O.A.C. 22, the Court of Appeal for Ontario explained the importance of reliability at paragraph 47:

. . . The issue is not merely whether the complainant sincerely believes her evidence to be true; it is also whether this evidenceis reliable. Accordingly, her demeanour and credibility are not the only issues. The reliability of the evidence is what isparamount. . . . [19] With respect to each fact witness, I have considered all relevant factors[6] and I have concluded that each fact witness is credible. [20] With respect to reliability, as much of the oral evidence of the Appellants addressed the purpose of the transactions in issue, I note thefollowing observation of Bowman, C.J. in Makuz et al. v.

R., 2006 TCC 263 at paragraph 32: I will outline briefly the evidence of the appellants but I should preface the outline with the caveat that statements of subjectiveintention about the reasons for entering into a transaction are considerably less persuasive than the objective facts andcircumstances surrounding the transaction. Without suggesting that there was any conscious dishonesty in a person’s statementsof subjective intention, they tend to be unreliable because they are influenced by many extraneous factors. What actuallyhappens is often a more reliable indication of a taxpayer’s purpose. D.

Hearsay Issues [21] The documentary evidence includes several public disclosure documents issued by Husky and other corporations. To the extent that theinformation in these documents is submitted for its truth, the evidence is hearsay. [22] However, for the Husky documents such as its 2003 Annual Report at tab 1 of the Joint Book and its press releases, I find that theinformation in such documents is admissible under the principled exception as being both necessary and reliable.[7] [23] With respect to the meaning of "“necessary”", in R. v.

F. (W.J.), (SCC), [1999] 3 S.C.R. 569 at page 585, paragraph31, the Court stated: Hearsay evidence may be necessary to enable all relevant and reliable information to be placed before the court, so justice maybe done. [24] In R. v.

U. (F.J.), (SCC), [1995] 3 S.C.R. 764 at page 787, paragraph 35, Lamer, C.J. stated: Necessity is met here in the same way it was met in B. (K.G.): the prior statement is necessary because evidence of the samequality cannot be obtained at trial. [Emphasis added.] [25] I find that the evidence is necessary because the numerous detailed facts in Husky’s publicly disclosed documents for 2003 areunlikely to be available to the Court in another form as a result of the effluxion of time and the frailties of human memory.

Therefore, theevidence would not otherwise be available if not admitted under the principled exception. [26] The standard for "“reliability”" is threshold reliability, not absolute reliability. To meet this standard, circumstantial guarantees oftrustworthiness must be established.[8] [27] Husky disclosed the information in documents such as its 2003 Annual Report and its press releases in accordance with applicableCanadian securities laws, which require disclosure of material facts and impose sanctions for failure to do so accurately and completely.

Inmy view, the circumstances in which the information in these documents is collected and presented by Husky provide circumstantialguarantees of its trustworthiness. In addition, there is no evidence that contradicts the detailed information in these materials or otherwisecalls into question the veracity of this information.[9] [28] I will identify information obtained from such documents as "“excepted hearsay evidence”". Generally, I have included theinformation in my reasons solely to provide a more detailed account of events described in general terms by the witnesses.

I note that theadmission of such evidence for its truth is not an indication of the weight, if any, accorded to the evidence. E.

Summary of the Evidence 1. Introduction [29] The PASF provides many detailed facts that I do not propose to repeat in these reasons.

However, I will reference these facts as needed. [30] In general, the oral evidence of the Appellants’ witnesses focused on the reasons for which UF Barbados, LF Barbados and HFBarbados (collectively, the "“Barbcos”"[10]) entered into the securities lending arrangements described in the PASF (the "“securitieslending arrangements”"); the effect of the securities lending arrangements; the ownership structure above the Barbcos and Luxcos; Husky’sreasons for paying the Special Dividend in 2003; and Husky’s role in the securities lending arrangements. 2. Husky’s Evidence [31] Mr. McGee and Mr.

Glynn testified on behalf of Husky. [32] Mr. McGee testified that he joined Husky in 1997 as CFO when it was a private corporation known as Husky Oil Limited ("“HOL”").At that time, the common shares of HOL were owned 49% by UF Barbados, 46% by LF Barbados and 5% by an indirect wholly ownedsubsidiary of the Canadian Imperial Bank of Commerce ("“CIBC”"). The capital of HOL also included Class A special voting sharesowned by corporations not relevant to these appeals. [33] Mr. McGee testified that in 2000, HOL merged with a listed corporation called Renaissance Energy Ltd. ("“Renaissance”") and thereby

became a publicly traded corporation listed under the name Husky Energy Inc. Following the merger, Husky had only common shares outstanding with one vote per share and no unanimous shareholder agreement. [11] [ 34 ] Mr. Glynn testified that Husky chose to declare the Special Dividend because at the time that the dividend was declared at a meeting of the board of directors of Husky on July 23, 2003 (the " “July 23 Meeting” " ), Husky was in a very strong financial position and wished to address the discount that the market placed on its common shares by generating revenue for its minority shareholders. Mr.

Glynn stated that because share buybacks were not common at the time, the Special Dividend was the only way to accomplish Husky’s objective. [12] [ 35 ] Mr. McGee testified that in 2003, Husky’s cash flow was particularly strong because commodity prices were higher than predicted in Husky’s budget for 2003. [13] [ 36 ] On July 24, 2003, Husky issued a press release describing its second quarter financial results as well as the Second Quarter Dividend and the Special Dividend. [14] [ 37 ] Mr.

McGee had no specific recollection of when he first heard about the Special Dividend but stated that he would have been involved in the preparation of the materials given to the board of directors of Husky for the July 23 Meeting, which meant that he would have been made aware of the Special Dividend about one week before that meeting. [15] [ 38 ] Mr. McGee testified that Husky had to comply with the covenants accompanying its debt and that he would have checked with the treasury group at Husky to confirm that the Special Dividend was not offside those covenants. [16] Mr.

McGee also stated that it was fundamental to Husky’s business that it maintain its credit ratings and that paying down Husky’s bond debt was not economic because of make-whole requirements. [17] [ 39 ] Mr. McGee testified that the excess cash at the end of the second quarter of 2003 was $460 or $470 million. [18] With respect to using the excess cash for investment opportunities, Mr. McGee stated: There was the issue, I guess of alternate use of the funds.

I guess you could say, you could take the money and invest it in additional businesses, additional assets; but we’re always looking for new investments, but they didn’t always arrive when you wanted them. So we looked at the cash flow, the budget was fully funded, the plan itself provided that there would be no debt at the end of the five years. So even though we paid special dividend, there was still being sufficient financial flexibility to take advantage of an acquisition. And indeed in the following months we did make an acquisition, Marathon. [19] [ 40 ] In cross-examination, Mr.

McGee stated that he did not know how the figure of $400 million was chosen but that the amount could be met out of Husky’s cash resources. [20] [ 41 ] Mr. Glynn testified that a week to 10 days prior to the July 23 Meeting, he received a call from Mr. Frank Sixt alerting him that the Special Dividend would be an item on the agenda. Mr. Glynn stated: A. . . . And it was of particular relevance to me, because as chairman . . . of the audit committee, there would have been some discussion about that at the audit committee and its capacity, Husky’s capacity to pay dividends. [21] [ 42 ] Subsequently, Mr.

Glynn had the following exchange with counsel for Husky: Q. . . . Based on your knowledge, tell us how the principal shareholders influenced the decision to pay the special dividend. A. How they influenced the decision? They simply obviously talked to management and formed the view and consulted board members individually in advance. And then there was an agenda item at the board for discussion, there was a vote, I’m sure it was unanimous, that it be approved. [22] [ 43 ] In cross-examination, Mr. Glynn had the following exchange with counsel for the Respondent: Q. And so he [Mr.

Sixt] calls you to brief you on -- I will use your word -- this proposal, and I imagine he wanted you to vote in favour of the proposal? A. I didn’t say that instantly, I wanted to read the material that he prepared to support the recommendation. Q. I don’t doubt that, sir, you wanted to read the materials, but Mr. Sixt, he wanted you to vote in favour of the proposal? Is that fair? A. No, he just simply said that this was coming up for consideration and explained a rationale for it. Q. And your response was that you wanted to see the papers and consider the matter before the July 23rd meeting? A.

I recognized it was on the agenda and I would come prepared to have a view. [23] [ 44 ] Following the declaration of the Husky Dividends at the July 23 Meeting, Husky was presented with the opportunity to purchase Marathon Oil Corp. ( " “Marathon” " ), which it did on October 1, 2003 for $831 million. Husky sold certain of Marathon’s assets for $431 million for a net purchase cost of $400 million. [24] [ 45 ] Mr. Glynn testified that there was no discussion regarding Marathon at the July 23 Meeting.

He described the $400 million net cost of Marathon as " “not a large amount in the scheme of things” " because at the time, Husky had a market capitalization of $15 to $20 billion. [25] [ 46 ] In cross-examination, Mr. Glynn confirmed that the Marathon transaction was not discussed at the July 23 Meeting and stated that he had no knowledge of whether the possible acquisition of Marathon was identified by, or being contemplated by, Husky’s management at that time. [26]

[ 47 ] Because the purchase of Marathon closed on the same day as the payment of the Husky Dividends, Husky drew down on its line of credit but repaid these amounts by the end of 2003. [27] Husky’s 2003 Annual Report states that despite the Special Dividend and the acquisition of Marathon, Husky’s net debt fell to $1.8 billion at the end of 2003 compared to $2.1 billion at the end of 2002. [28] Referencing page 58 of Husky’s 2003 Annual Report, Mr.

McGee testified that Husky’s long-term debt at the end of 2003 was $1.698 million compared to $2.385 million at the end of 2002. [29] The same page of the Husky’s 2003 Annual Report states that at the end of 2003, Husky had no balance on its syndicated line of credit. [ 48 ] Mr. McGee testified that he had no specific recollection of when he was told of the proposed securities lending arrangements. However, on the basis of the e-mail trail, he believed that it was one week before the July 23 Meeting, [30] which would have been around July 16, 2003. Mr.

McGee stated that to the best of his knowledge, Husky was not involved in the decision to implement the securities lending arrangements , nor was it involved in the drafting of the associated documents; he also stated that he had no recollection of internal discussions regarding the securities lending arrangements. [31] [ 49 ] In cross-examination, Mr. McGee repeated that he did not recall when he became aware of the securities lending arrangements but that it was likely one week before the July 23 Meeting. [32] [ 50 ] Mr.

McGee testified that his role with respect to the securities lending arrangements related to the fact that Husky common shares were being transferred and the resulting change in registered shareholders, which in turn raised withholding tax considerations. [33] [ 51 ] Mr. McGee stated that there were no instructions from the Barbcos to obtain the 5% withholding tax rate. Mr. McGee also stated that the withholding tax rate did not affect Husky’s financial position since it paid the gross amount of the Dividends. [34] [ 52 ] Mr.

McGee testified that Computershare maintained the share register for Husky, paid the dividends declared on Husky common shares and issued tax forms to the shareholders that received dividends. [35] Mr. McGee helped HWL with Computershare [36] and Computershare did register the transfer of the Husky common shares to the Luxcos that occurred because of the securities lending arrangements. [37] [ 53 ] In cross-examination, Mr. McGee acknowledged that an e-mail to him from Don Roberts dated July 23, 2003 [38] asked for his help with Computershare and included an e-mail from Computershare that referenced the Barbcos.

In the e-mail, Mr. Roberts states: " “This is exactly why we needed your involvement so the registrar is well aware that Husky knows the shareholder and all of this bureaucracy can be smoothly handled.” " Mr. McGee identified his handwritten note on the e-mail which states: " “Spoke to Jim Girgulis. He advised that the issues raised by HWL had been resolved.” " [39] [ 54 ] In cross-examination, Mr. McGee was asked about a series of e-mails that ends with an e-mail from him to Dino Farronato, head of global taxation for HWL, dated July 31, 2003. [40] Mr.

McGee states: " “Our tax group have advised that, based on the documentation received, the withholding tax on HEI dividends paid to Hutchison Whampoa Europe Investments S.A.R.L. and L.F. Luxembourg S.A.R.L. would be at the rate of 5%.” " [ 55 ] In response to questions from counsel for the Respondent regarding the earlier e-mails in the chain between him and David Weekes of Stikeman Elliott, Mr. McGee acknowledged that he must have requested a legal opinion from Stikeman Elliott regarding the rate of

Part XIII tax on the Dividends as the opinion was addressed to him. [41] Mr. McGee did not however recall whether he had requested the documents identified by David Weekes in an e-mail from David Weekes to Dino Farronato and others dated July 18, 2003. [ 56 ] Mr. McGee testified that HOL paid dividends on its shares in United States dollars and that, after its merger with Renaissance, Husky continued to pay dividends to the Barbcos in United States dollars. Mr. McGee described the process as follows: . . .

So what happened when Husky Oil became Husky Energy, that practice continued so that on a dividend payment date Computer Share [ sic ] would do their run of all the dividend warrants. They would -- I think this is the way it was -- it would cancel the two warrants for the two shareholders because Husky would pay those two shareholders directly. It would take the exchange rate on the dividend payment date of Canadian dollar and U.S. dollar and then remit the U.S. dollar funds to the shareholder. [42] [ 57 ] In cross-examination, Mr.

McGee again stated that Husky had been paying dividends to the principal shareholders directly since 2000 when HOL merged with Renaissance. [43] Mr. McGee acknowledged that this arrangement was not reflected in Husky’s Transfer Agent, Registrar and Dividend Disbursing Agent Agreement with Montreal Trust Company of Canada dated July 14, 2000. Mr.

McGee suggested that " “it was probably an arrangement that wasn’t documented” " and that so far as he was aware, Computershare had never refused to pay dividends to Husky’s principal shareholders notwithstanding ambiguous (double hearsay) comments in an e-mail from Ian McNair to John Evans dated September 12, 2003. [44] [ 58 ] In re-examination, Mr. McGee stated that as far as he was aware, Computershare had never paid dividends to the principal shareholders of Husky and that Husky had paid the dividends because the principal shareholders wanted their dividends paid in United States dollars. [45] [ 59 ] Mr.

Glynn testified that the securities lending arrangements were never " “flagged” " at any board of directors meeting or audit committee meeting of Husky and that " “[o]ther than being asked . . . today, I don’t recall ever knowing about it.” " [46] As well, Mr.

Glynn stated that Husky’s tax department would provide regular updates to the audit committee, but that tax risk associated with the Special Dividend was never raised either with the audit committee or with the board of directors of Husky. [47] [ 60 ] In cross-examination, in response to questions as to whether a change of control was brought to his attention or brought up at a Husky board of directors meeting held in 2003, Mr. Glynn stated " “no” " . [48] Mr. Glynn also stated that a change in the voting rights of Husky common shares was never discussed. [49] [ 61 ] In re-examination, Mr.

Glynn had the following exchange with counsel for Husky: Q. . . . To your knowledge, in your 20 years with Husky, were the decisions of any of the independent board members dictated

or directed by the principal shareholders? 12 A. In my experience, no. I don’t know I can’t think of a case where an independent director was directed by one of the personal [ sic , principal] shareholders. There was a great level of cordiality, respect, and seniority on the board that would have presented [ sic , prevented] that from happening. [50] [ 62 ] In chief, Mr. Glynn was asked about the directors of Husky. Mr. Glynn testified that nine of the 14 directors were considered " “independent” " . He identified as not being " “independent” " Mr. Victor Li, Mr. Canning Fok, Ms. Poh Chan Koh, Mr.

John Lau, and Mr. Frank Sixt. [ 63 ] With respect to what he meant by " “independent” " , Mr. Glynn stated: A. . . . You’re either independent or you’re not. And I just described who I believe to be independent. After I left the audit committee, I subsequently became chair of the governance committee. So on a regular basis we would go to outside counsel and make sure that there was no doubt as to the independence, because we had to state that in our circulars. . . . So in reading this list I believe nine out of 14 are independent. [51] [ 64 ] Mr.

Glynn also stated that the members of the audit and governance committees of Husky were all independent directors. [52] [ 65 ] In cross-examination, counsel for the Respondent observed, and Mr. Glynn agreed, that the list of directors on pages 117 and 118 of Husky’s 2003 Annual Report showed that two of the directors identified by Mr. Glynn as independent, Mr. Shurniak and Mr. Kwok, were also on the boards of HWL and Cheung Kong (Holdings) Limited ( " “CKHL” " ), respectively. [ 66 ] In chief, Mr. Glynn was asked about the nomination process for members of Husky’s board of directors. Mr. Glynn stated: A.

The governance committee had a role to play. They had a skills matrix. They had the desire for competence, diversity, and this was built up around the springtime where in advance of the AGM were the circulars and the slate of the directors were proposed. So the co-chairs differently [ sic , definitely] had a big role to play in in [ sic ] giving advice and listening to advice from governance committee.

And so a slate was proposed and voted on by the AGM, and my recollection is we had pretty favourable results including from minority shareholders to the slate of directors total. [53] [ 67 ] In cross-examination, Mr. Glynn stated that Mr. Victor Li—Mr. Li Ka-Shing’s son—indirectly asked him to be a director of Husky through the Chairman of HSBC. At the time, Mr. Glynn was the CEO of HSBC. Mr. Glynn described the request as somewhat unusual given his duties as CEO and stated that " “we needed to check with people to see whether that was okay” " given the time commitment. [54] In response to being asked whether Mr.

Fok was involved in the request for him to become a director of Husky, Mr. Glynn answered, " “I don’t remember him being involved, no.” " [55] [ 68 ] Also in cross-examination, Mr. Glynn testified that when he became a director of Husky in 2000, he knew two members of Husky’s board of directors, one by reputation and another because he was a customer of HSBC. As well, he may have known Mr. Frank Sixt, who was previously a lawyer in Vancouver. [56] 3. HWLH’s Evidence [ 69 ] Mr. Roberts testified on behalf of HWLH. Mr. Roberts acquired his chartered accountant designation in Canada in 1975. Mr.

Roberts joined HWL in 1988 as group chief accountant and became the group deputy chief financial officer in 2000. UF Barbados was one of the companies under his purview. [57] Mr. Wai Ying Fung reported to him on the affairs of UF Barbados. [58] Mr. Roberts frequently referred to Mr. Fung as WY Fung. [ 70 ] Mr. Roberts described his role as group deputy chief financial officer as follows: My roles and responsibilities were the accounting policies for the listed entity and the group worldwide, the accounting for the headquarters, and the holding companies that were -- the accounts were maintained in head office.

I was in charge of tax planning and tax compliance. I was also in charge of financial reporting and preparing the annual report in accordance with the stock exchange requirements in Hong Kong. [59] [ 71 ] In cross-examination, Mr. Roberts agreed that the operations of the HWL group of companies were mainly in HWL’s wholly owned subsidiary, Hutchison International Limited ( " “HIL” " ), and that he was employed by HIL. Mr. Roberts confirmed that he reported to Mr. Frank Sixt, who was the group chief financial officer of and an executive director of HWL, as well as a director of CKHL, and to Ms.

Susan Chow, who was the deputy managing director of HWL. [60] [ 72 ] Mr. Roberts testified that at the relevant time, UF Barbados was an indirect wholly owned subsidiary of HWL. [61] HWL was listed in Hong Kong and had its headquarters in Hong Kong. HWL was involved in five major business sectors and had operations in 30 countries.

The HWL group of companies consisted of about 2,500 companies. [62] [ 73 ] UF Barbados was registered in Barbados as a regular business company and was the holding company for investments in Canada such as Husky. [63] HWL included UF Barbados’ financial results in its consolidated financial statements. [64] [ 74 ] Mr. Roberts testified that 49.97% of the shares of HWL were owned by CKHL and that CKHL did not consolidate its financial results with those of HWL. [65] [ 75 ] Later in his testimony, Mr.

Roberts stated that HWL and CKHL were associated under the accounting rules, but that CKHL did not own 50% or more of HWL. He explained that if CKHL had a 50% or greater shareholding in HWL, it would have been required to

consolidate CKHL’s and HWL’s financial results under the applicable accounting rules. Mr. Roberts testified that the financial results of CKHL and HWL were not consolidated and that CKHL accounts for HWL as an associated company. [66] [ 76 ] I recognize that such statements include an element of opinion. However, Mr. Roberts is a chartered accountant who in 2003 was the group deputy chief financial officer of HWL. Mr. Roberts testified that he played a material role in the preparation of HWL’s 2003 financial statements and 2003 annual report. In my view, Mr.

Roberts’s evidence regarding the accounting rules followed by HWL and CKHL falls under the exception for participant experts. [67] [ 77 ] UF Barbados started to receive quarterly dividends from Husky in the second quarter of 2001. During 2001 and 2002, on a gross basis, UF Barbados was entitled to approximately Can$150 million of dividends. These dividends net of 15%

Part XIII tax were settled in United States dollars. [68] [ 78 ] For Barbados tax purposes, UF Barbados reported the net amount of the dividends that it received from Husky as dividend income. A copy of the 2003 Barbados tax return of UF Barbados is included at tab 86 of the PASF. Mr. Roberts understood that the rate of Barbados tax for 2001 and 2002 was the 36% rate stated on the 2003 tax return. [69] [ 79 ] UF Barbados offset its dividend income from Husky with interest expense so that no tax was payable in Barbados. The interest was paid by UF Barbados to U.F.

Holdings Limited ( " “UF Holdings” " ), the immediate parent of UF Barbados; to Union Faith Energy (UK) Limited, the immediate parent of UF Holdings; and to a sister corporation called Holodeck Limited. [70] [ 80 ] Mr. Roberts testified that UF Barbados owned approximately 35% of the common shares of Husky and that to the best of his knowledge, there was no contractual arrangement between UF Barbados and another shareholder of Husky to establish joint control over the economic activities of Husky. [71] [ 81 ] Dino Farronato advised Mr. Roberts of the special dividend on July 2 or 3, 2003. Mr.

Farronato was the head of group taxation for HWL, reported directly to Mr. Roberts and had an office next door to Mr. Roberts. Mr. Roberts discussed with Mr. Farronato if it was possible to reduce the tax of UF Barbados as much as possible. [72] [ 82 ] In cross-examination, Mr. Roberts agreed that he would ask their Canadian tax advisors to consider the Canadian tax consequences of whatever it was they were planning to do and that tab 18 of the Joint Book addresses the potential tax savings from the securities lending arrangements. [73] More generally, Mr.

Roberts had the following exchange with counsel for the Respondent: Q. Right. So but my question, it was to reduce as much as possible the taxation with respect to that dividend of Husky, and that included two components, one being the 36 per cent Barbados tax, the second one was the 15 per cent withholding tax. Is that a fair statement? A. It’s a fair statement on the basis that we were always trying to reduce taxes. So if this is one of them, we will try to reduce it, yes. [74] [ 83 ] Mr. Roberts testified that he worked with Mr.

Farronato and discussed the Barbados tax consequences to UF Barbados with Ernst & Young’s ( " “E&Y” " ) office in Barbados on July 3 or 4, 2003. [75] Mr. Farronato described the tax consequences of the special dividend to UF Barbados and UF Holdings and Husky’s obligation to withhold

Part XIII tax in an e-mail to Mr. Roberts and other senior officers of HWL sent July 5, 2003. [76] [ 84 ] Mr. Roberts testified as to his understanding of the tax consequences of the special dividend to UF Barbados based on his daily conversations with Mr. Farronato. Mr. Roberts understood that UF Barbados would pay tax under

Part XIII of the ITA equal to 15% of the special dividend and would receive a tax credit in Barbados for that tax. As a result, the effective tax rate in Barbados was 21%. [77] [ 85 ] Mr. Roberts testified that initially, two options were considered: migrating UF Barbados to another jurisdiction and increasing the interest rate on the debt owed by UF Barbados. The first option was rejected because it would take too long and was too difficult. For the second option, E&Y advised that the interest expense had to be reasonable. Interest calculations showed a required rate of 13.8%, which Mr.

Roberts described as very high. [78] [ 86 ] On July 10, 2003, Mr. Farronato wrote an e-mail to Mr. Wim Piot at PricewaterhouseCoopers’ ( " “PwC” " ) office in Luxembourg, which states, in part: We are therefore considering implementing the stock lending idea. [Redaction.] We will give you more details and will need to get a sign off on the Luxembourg tax and commercial law issues. We are aiming to get the stock lending in place before 24 July, 2003. The Husky shares owned by HWL’s Barbados subsidiary will be lent to HWEI.

However we would prefer not to lend to HWEI the shares held by the Barbados companies owned by the Li Family companies. We therefore need to urgently set up a new Luxembourg company to be owned by a Cayman Islands Trust. [79] [ 87 ] HWEI was a company incorporated in Luxembourg that invested in various operations in Europe, mainly, telecommunications and container ports. [80] Mr. Roberts described the stock lending idea as follows: A. The idea was to have the shares registered in the name of Hutchison Whampoa, HWEI, and not registered in the UF Barbados.

On that basis the dividend income would be received by HWEI in Luxembourg, and would not be subject to tax in Barbados. [81] [ 88 ] With respect to the reference by Mr. Farronato to the Li family companies, Mr. Roberts had the following exchange with counsel for HWLH: Q. Who are the Li family companies?

A. Li family companies are LF Barbados and HF Barbados. Q. What was your involvement with respect to the Li family companies? A. I was not involved in the Li family companies. WY Fung was responsible for those companies. He had been for a number of years. Q. Was your recommendation with respect to stock lending idea, stock lending, contingent on what the Li family companies would do? A. No, it wasn’t contingent. Q. Were the Li family companies part of what you have been describing as the Hutchison group of companies? A.

No, they were not part of the listed HWL group of companies and not consolidated. [82] [ 89 ] Mr. Roberts testified that the Li family companies—LF Barbados and HF Barbados—were mentioned in Mr. Farronato’s e-mail because they had engaged the same advisors and that " “it seemed only natural that with WY Fung being responsible for them that we would look at consequences together for the tax.” " [83] [ 90 ] Mr. Roberts stated that Mr. Fung was an employee of HWL who wore two hats.

He was responsible for the accounting of the " “head office companies” " that was done by HWL and was also responsible for LF Barbados and HF Barbados. Mr. Fung reported to Mr. Roberts with respect to the former role but not the latter role. Mr. Roberts was not involved in setting up LF Luxembourg. [84] [ 91 ] On July 7, 2003, Mr. Roberts participated in a conference call that included Mr. Farronato and representatives from PwC and E&Y. Mr. Roberts could not recall if anyone else participated but stated that no Canadian advisors were on the call as Canadian tax was not discussed. [85] [ 92 ] Mr.

Roberts testified that he made recommendations to Ms. Susan Chow, the deputy managing director of HWL and a director of HWEI, and to Mr. Frank Sixt, the group CFO of HWL and a director of HWEI. The recommendations did not contemplate what LF Barbados and HF Barbados were to do and were not contingent on or related to what LF Barbados and HF Barbados were doing. The ultimate decision to proceed was made by the boards of UF Barbados and HWEI. [86] [ 93 ] The documents for the share lending arrangements were drafted and settled for UF Barbados and HWEI and then were passed on to Mr.

Fung to be settled for LF Barbados, HF Barbados and LF Luxembourg. [87] [ 94 ] Mr. Roberts identified his undated handwritten notes listing items that he wanted to review in respect of UF Barbados and HWEI, including the securities lending agreements, the borrowing request, the subscription agreement and the agenda and draft minutes for the board of directors’ meetings to be held on July 22, 2003. He stated that he wanted to review the agenda for the board meetings to ensure that the agreements were placed before the board of directors for approval and authorization for someone to sign them. [88] [ 95 ] Mr.

Roberts testified that the statement in his notes that the " “key is Barbados tax opinion” " reflected his opinion at the time that the key to the plan was the Barbados tax opinion. Mr. Roberts stated: The tax opinion, we were looking for an opinion that discussed how the SLA would be treated, if it was to be treated as a disposal of shares, and if there was a capital gain, how it would be treated. In addition, the SLA called for a repayment in the dividends paid during the landing period, to be under the subscription agreement to be repaid, or paid as compensation.

This was going to be done under the subscription agreement as a capital contribution. So we were looking for Barbados to give us assurance that that amount would not be taxable in Barbados. [89] [ 96 ] Mr. Roberts testified regarding a draft of E&Y’s Barbados tax opinion. [90] Mr.

Roberts stated that he crossed out the paragraph on page 7 of the draft that stated that " “it can also be argued that " ” the main purpose of the capital contribution to UF Barbados was to reduce Canadian tax, because a main purpose had already been identified earlier in the draft and because the argument erroneously assumed that Husky had underlying foreign taxes. [91] [ 97 ] In cross-examination, counsel for the Respondent took Mr.

Roberts to the consolidated financial statements in Husky’s 2003 Annual Report. [92] Page 73 of the Annual Report shows current income taxes of $147 million and total dividends paid for 2003 of $580 million. Mr. Roberts testified that the amount of tax was small in comparison to the dividends paid and that to obtain a tax credit in Barbados, the tax paid in Canada had to be related to the profit from which the dividends were paid. [93] Mr. Roberts then had the following exchange with counsel: Q. How are you getting -- where do you get this information? A. Because we never claimed it in Barbados. Q.

But do you have a document? Is that reflected this this “[ sic ]”? A. No, I can’t say it is. Q. Do we have it somewhere in the production? A. In the productions here, no. We filed the tax returns every year. We questioned, is there any underlying taxes, no, there’s not. [94] [ 98 ] Mr. Roberts testified that the overseas securities lending agreement between UF Barbados and HWEI (the " “UF OSLA” " ) was prepared by in-house counsel at HWL. Mr. Roberts stated that he reviewed one or two drafts, that there was minimal negotiation of the

terms of the UF OSLA because the two parties were sister corporations, and that some of the terms of the UF OSLA were modified by the borrowing request issued by HWEI to UF Barbados. [95] [ 99 ] In cross-examination, Mr. Roberts stated that the UF OSLA was motivated by tax planning to move UF Barbados’ common shares in Husky from UF Barbados to HWEI so that HWEI would receive the dividends paid on October 1, 2003. Mr. Roberts stated that HWEI would realize the interest on the term deposit and an interest savings from temporarily reducing the loan from Hutchison OMF Limited ( " “HOMF” " ). [96] [ 100 ] Mr.

Roberts identified two e-mails sent by him. The first e-mail was sent to an individual at Computershare in response to a request for additional documentation for the transfer of Husky common shares from UF Barbados to HWEI and from LF Barbados and HF Barbados to LF Luxembourg. [97] With respect to the reference in the e-mail to LF Barbados and HF Barbados, Mr. Roberts stated that all three Barbados companies used the same advisors and that an individual with E&Y in Barbados was the corporate secretary for all three companies. [98] The second e-mail was sent to Mr.

McGee asking him to call Computershare to facilitate transferring the Husky common shares as soon as possible. [99] [ 101 ] Counsel for HWLH asked Mr. Roberts about tabs 17 and 18 of the Joint Book. Tab 17 is an e-mail from Mr. Farronato to Mr. Roberts dated July 26, 2003 and tab 18 is an attachment to the e-mail titled " “Tax saving from Husky share swap” " showing the tax savings to each of UF Barbados, LF Barbados and HF Barbados. The attachment shows Canadian tax savings from the reduction in the rate of

Part XIII tax from 15% to 5% and Barbados tax savings from the reduction of the income tax rate from 21% to nil. Mr. Roberts explained the inclusion of all three Barbados companies in the attachment: A. All three companies had investments in Husky. They were using the same advisors. Dino was assisting WY to implement it. Our head office company -- our head office legal team was also assisting. It just made sense to put it all together on one piece of paper. Efficiently to say all three companies were affected this way. [100] [ 102 ] Mr.

Roberts testified that the request for a Luxembourg tax ruling was submitted by letter dated July 30, 2003 and that that tax ruling was issued (by stamping the ruling request) on August 4, 2003. [101] The first paragraph on page 3 of the ruling request states: As explained above, HWEI will be the legal owner of the Husky shares loaned and will be legally entitled to receive any dividend declared by Husky. Likewise HWEI will recognize the Husky shares in its accounts and will book any dividend declared by Husky.

At the end of the SLA period, HWEI will have to redeliver the Husky shares to UFI and pay the additional contribution to UFL. HWEI will not bear any material risk in connection with the Husky shares. The profits and the risks on the Husky shares will be ultimately borne by UFI and the HWL companies. [ 103 ] Mr. Roberts understood the risk referred to in this paragraph to be the market risk related to the Husky shares, that is, the risk of the value of the Husky common shares increasing or decreasing during the term of the lending arrangement. [102] [ 104 ] Mr.

Roberts testified that as of August 2003, E&Y had not issued a final Barbados tax opinion and the Barbados tax authorities had not issued a tax ruling. In order to mitigate Barbados tax risk, the interest rate on the intercompany debt of UF Barbados was increased to 13.8% retroactive to January 2, 2003, which Mr. Roberts described as " “belt and braces” " to the plan. The interest rate was reduced to 6.63% effective at the beginning of 2004. [103] [ 105 ] In cross-examination, counsel for the Respondent asked Mr. Roberts about the interest rate calculations at tab 26 of the Joint Book. Mr.

Roberts agreed with counsel that the 13.756754% interest rate shown for UF Barbados—ultimately rounded up to 13.8%—was sufficient to shelter the compensation payment of Can$161,203,611 and the expected quarterly dividends for 2003 of Can$41,069,344, and that the same interest rate exercise was done for UF Holdings because of its increased interest income. [104] Mr. Roberts recalled that the tax rate in Barbados for UF Holdings as an international business corporation was 1% to 2.5%. [105] [ 106 ] Mr.

Roberts agreed with counsel for the Respondent that the 2003 Barbados tax return of UF Barbados [106] showed at line 432 a deduction for interest expense of Barbados $294,878,074, which Mr. Roberts agreed was reflected as Can$191,479,269 in the 2003 financial statements of UF Barbados. The interest deduction resulted in a net loss for the year of Barbados $231,608,074, which Mr. Roberts agreed was sufficient to shelter UF Barbados’ share of the Dividends. [107] Counsel and Mr. Roberts then had the following exchange: Q.

So, then, the only reason to enter into the shareholding agreement is to get around the 15 per cent withholding tax. Is that a fair statement? 4 A. That’s not a fair statement. The SLA was entered into to ensure the dividend was received by HWEI . The interest was calculated after that, as a belt and braces, as I explained earlier, if the tax treatment was not going to be the capital treatment, the full 161 million would have been then taxable. So it’s an if, and if so, we needed this belt and braces to shelter that dividend income.

Either on assessment or -- I guess under GAAR as well it could have been (inaudible). Q. But sir, if this had been paid directly, you wouldn’t have needed to bump up the interest rate to 13 per cent, because you would have had the ability to use the foreign tax credit. So then the rate would have been around eight. Is that a fair statement? A. There still would have been tax payable. I don’t know whether eight per cent is right, but there was not enough interest income without changing the rate and that was done as a belt and braces. We were reducing the assessable income in Barbados to zero by the SLA. Q.

But again, my point is you didn’t -- having it paid directly, you wouldn’t have had to increase the rate as you did, correct? A. We needed -- if we didn’t increase it then there would have been Barbados tax to pay. Q. But the point is you could have increased it less to somewhere around eight per cent, and the dividend could have been paid directly by Husky and there would be no tax in Barbados. That’s the point that I’m making.

A. The calculation of the interest we did not do. I don’t remember doing that calculation. It would have been less than the 13.8, but it would have been significantly more than the year before. And the interest rates you showed me at zero and 3.15. And there would have been tax paid.

Unless the interest rate was also retroactively changed to a smaller number, but still, a substantial increase in interest rates. [108] [ 107 ] In 2003, HWEI had its offices in Luxembourg and employed seven or eight individuals. [109] HWEI’s financial statements for 2003 show employee remuneration of 769,902 euros and approximately 9.5 billion euros owed to group companies, including HOMF.

The expenses of HWEI in 2003 consisted mainly of interest and administration costs. [110] [ 108 ] On July 24, 2003, UF Barbados transferred 146,548,737 common shares in Husky to HWEI pursuant to a borrowing request dated July 22, 2003. [111] On October 1, 2003, Husky paid HWEI the HWEI Dividends. The gross amount of the HWEI Dividends was Can $161,203,610, of which Husky withheld Can $8,060,180.54 on account of tax under

Part XIII of the ITA. The net payment in United States dollars was $110,564,962.28. [112] [ 109 ] Counsel for HWLH asked Mr. Roberts to explain the use of the dividends and how the dividends and related amounts were reported by HWEI in its financial statements. HWEI placed US$110,564,000 in a term deposit from October 1 to 6, 2003 and on October 6, 2003 transferred US$110,564,962.28 to HOMF to pay down its debt to HOMF. The interest that had been earned on the term deposit was not transferred to HOMF.

On November 20, 2003, HWEI drew down US$123,535,333.87 on its credit facility with HOMF and remitted the funds to UF Barbados in payment of the subscription price for 10,000 Class B redeemable preference shares and the compensation payment required under the UF OSLA. The various amounts were reported in HWEI’s financial statements in euros. [113] [ 110 ] On November 17, 2003, UF Barbados gave notice to HWEI to return 146,548,737 common shares of Husky.

On November 20, 2003, HWEI presented the share certificate for, and executed an irrevocable power of attorney for the transfer to UF Barbados of, 146,548,737 common shares of Husky. [114] [ 111 ] As a result of the appreciation of the Canadian dollar and the euro against the US dollar over the period from October 1, 2003 to November 20, 2003, HWEI had to borrow an additional 9.4 million euros from HOMF to fund the foreign exchange loss that it realized when making the compensation payment to UF Barbados.

As well, because the compensation payment was equal to the gross amount of the HWEI Dividends (Can$161,203,610), HWEI had to borrow a further 4.7 million euros from HOMF to fund the compensation payment. The foreign exchange loan was forgiven in 2003 under the terms of a hedging agreement between HWEI and HOMF dated December 11, 2000. [115] [ 112 ] Because of an error, the withholding tax loan was not forgiven until 2009. The 2003 Luxembourg tax return was corrected to add back the amount of the loan, and a revised Luxembourg tax ruling was obtained reflecting the failure to waive the loan in 2003.

The 2009 Luxembourg tax return of HWEI reflected the forgiveness of the loan in 2009. [116] [ 113 ] Counsel for HWLH asked Mr. Roberts to explain the financial statements of UF Barbados for 2003. The dividends reported on the financial statements were the quarterly dividends paid by Husky to UF Barbados for the first, third and fourth quarters of 2003 plus a small amount paid for the second quarter on shares of Husky acquired by UF Barbados after July 22, 2003. The statements also included the 15%

Part XIII tax paid to Canada on the dividends and interest expense of Can$191,479,269. The interest expense reported was considerably higher than the interest expense for 2002 because of the increase of the interest rate to 13.8%. [117] [ 114 ] Mr. Roberts testified that tax opinions addressing the securities lending arrangements were obtained from E&Y in Barbados and from PwC in Luxembourg and that tax rulings were requested and obtained from the Barbados and Luxembourg tax authorities.

The Barbados tax ruling was requested and issued on a no-names basis first on October 21, 2003 and again in a slightly amended form on April 7, 2004. [118] [ 115 ] Mr. Roberts testified that HWEI was originally named Symphonium S. à .r.l. and that in 2000, the then sole shareholder of Symphonium, which was a 100% indirect subsidiary of HWL, transferred all of its shares to three companies called Auditorium Investments 1 S. à .r.l., Auditorium Investments 2 S. à .r.l. and Auditorium Investments 3 S. à .r.l., all of which were 100% indirect subsidiaries of HWL.

The name of Symphonium was changed to HWEI in 2001 but the ownership remained the same through 2003. Mr. Roberts stated that HWEI and UF Barbados were both 100% indirect subsidiaries of HWL, that UF Barbados had no direct or indirect interest in HWEI, and that there was no agreement to vote the shares of HWEI or unanimous shareholders agreement as HWEI and its shareholders were all 100% indirect subsidiaries of HWL. [119] [ 116 ] Counsel for HWLH asked Mr. Roberts about a

section in HWL’s 2003 Annual Report [120] titled " “Directors’ Interests and Short Positions in Shares, Underlying Shares and Debentures” " commencing on page 506. The introductory paragraph describes the content of the section. Mr. Roberts was involved in the drafting of the annual report and understood that the disclosure was required under the securities laws of Hong Kong. [121] [ 117 ] Mr.

Roberts stated his understanding that the number of shares added up to more than 100% of the shares of HWL because the interests shown are deemed interests in shares rather than the number of shares actually owned by the director. [122] [ 118 ] Mr. Roberts testified that the numbers for Cheng Kong Holdings group were obtained from Eirene Yeung, who was the corporate secretary of CKHL, and that the numbers for the Li family trusts were obtained from the trustees or their legal representatives. 4. LFMI’s Evidence

a) Evidence of Mr. Wai Ying Fung [ 119 ] Mr . Wai Ying Fung testified on behalf of LFMI. Mr. Fung holds a chartered professional accountant designation in Canada and is a fellow member of the Chartered Institute of Management Accountants and the Hong Kong Institute of Certified Public Accountants. Mr. Fung joined HWL in November 1999 as group chief accountant and held that position in 2003. Before moving to HWL, Mr. Fung worked for a company called Concord Pacific in Vancouver, which was owned and controlled by the Li family, and prior to that worked for CKHL

from 1973 to 1987. [ 120 ] In cross-examination, Mr. Fung stated that he was employed by HIL and that his only remuneration was the salary paid to him by HIL. [123] Mr. Fung stated that he reviewed the financial statements of approximately 200 companies that were managed in the head office of HWL prior to sending them to the directors of the companies for approval. Mr. Fung reviewed the financial statements of HWEI prepared by employees of HWEI prior to sending them to the directors of HWEI for approval. Mr. Fung also prepared the financial statements for the annual report of HWL. [124] [ 121 ] Mr.

Fung testified that LF Barbados was an investment company established to hold shares in Husky and two or three other corporations. HF Barbados was established prior to 2003 to acquire shares in Husky owned by CIBC. In 2003, LF Barbados was owned indirectly by Mr. Li Ka-shing and a trust for the Li family, and HF Barbados was owned indirectly by Mr. Li Ka-shing. LF Barbados and HF Barbados were amalgamated to consolidate the assets in those companies into a single corporation (New LF Barbados). Mr. Fung was one of several directors of LF Barbados, HF Barbados and New LF Barbados. Mr.

Fung stated that he did not report to anyone in his role as a director. [125] [ 122 ] Mr. Fung testified that UF Barbados was owned indirectly by HWL and that Mr. Li Ka-shing did not have any control over UF Barbados. [126] [ 123 ] Counsel for LFMI asked Mr. Fung about an insider report that was dated November 20, 2003 and that had been sent to Stikeman Elliott by Ms. Eirene Yeung, the Corporate Business Council & Company Secretary for CKHL. Mr. Fung identified the signature on the report as that of Mr. Li Ka-shing. The report identified an ownership interest of New LF Barbados in Husky. Mr.

Fung stated that the report did not address the shares held in Husky by UF Barbados because Mr. Li Ka-shing was not considered an insider in respect of those shares. [127] [ 124 ] Mr. Fung testified that he was advised of the potential of Husky declaring the special dividend by Mr. Farronato, the head of group taxation for HWL. [128] Mr. Fung identified an e-mail dated July 4, 2003 in which Mr. Farronato requests an opportunity to discuss with Winston Gibbs of E&Y Barbados " “the tax position of our Barbados companies.” " Mr.

Fung stated that the concern was that the companies may not have sufficient expenses and that tax would be payable in Barbados. Mr. Farronato was seeking options to address this concern. [129] [ 125 ] Mr. Fung testified that he was not involved in developing the plan for the securities lending arrangements. Mr. Fung understood that the plan was developed internally by Mr. Farronato and Mr. Roberts. Mr. Farronato asked Mr. Fung for financial information about, and the tax position in Barbados of, UF Barbados, LF Barbados and HF Barbados. All three companies retained the same tax advisors. [130] [ 126 ] Mr.

Fung testified that the purpose of the securities lending arrangements was mainly to shift the special dividends out of Barbados to avoid paying tax there. The boards of directors of LF Barbados and HF Barbados approved the securities lending arrangements, and Luxembourg was chosen because HWL had had companies in Luxembourg for eight years and was aware of the domestic tax rules in Luxembourg. LF Luxembourg was created because the Li family did not have any companies in Luxembourg. Mr. Fung identified HWL’s Luxembourg company as HWEI and stated that HWEI was not owned by Mr. Li Ka-shing. [131] [ 127 ] Mr.

Fung testified that he asked Ms. Eliza Yee, the assistant company secretary for HWL, to set up LF Luxembourg, which he stated was owned by the Li family trust. The e-mail that Mr. Fung sent to Ms. Yee stated that she could contact Ms. Shirley Yeung of CKHL. [132] Mr. Fung described his involvement in the arrangements as follows: A. In the planning stage, I was not involved in the planning stage. My involvement is only to provide the financial support, financial information to Dino Farronato for him to discuss with the consultants, the advisors.

My role in that was to approve the deal, the agreements in the board meetings and then -- and also -- let’s see. For the transfer of shares, I was involved in the implementation of the transfer of shares to the borrower to the LF Luxembourg from LF Barbados and HF Barbados, and I carried those share certificates to Atchison & Denman Vancouver for to sign off the revocable power of attorneys there, as witnessed by CIBC. [133] [ 128 ] In cross-examination, counsel for the Respondent asked Mr.

Fung if it was common to contact the secretary of HWL for this type of transaction and observed that the secretary of CKHL and the secretary of HWL were both involved in the creation of LF Luxembourg. [134] Mr. Fung responded: A. It should be the duty of the company secretary of Chung [ sic , Cheung] Kong Holdings to look after the affair of Li Ka- shing. Li Ka-shing, the family trust of Li Ka-shing, this is a case, because they didn’t have any connection over there in Luxembourg. That’s why we asked Eliza Yee’s help to help to arrange the incorporation of the two.

Plus, Eliza Yee help to incorporate another company in Luxembourg for the Li family, and that is why we have the CC. We have copied all the correspondence with all the Luxembourg consulting advisor, so that the company secretary department of Chung [ sic , Cheung] Kong would follow up. Q. So you’re saying that the responsibilities in dealing with the LF -- or Li Ka-shing’s investments, sides with Chung [ sic Cheung] Kong Holdings? A. Yes. Q. Is that a fair statement? A. Yes. [135] [ 129 ] Mr.

Fung testified that he attended in person in Barbados the meetings of the boards of directors of LF Barbados, HF Barbados and UF Barbados held on July 22, 2003. Mr. Fung stated that the minutes were accurate and that the securities lending arrangements were approved at these meetings. [136] Mr. Frank Sixt, who was one of the directors, presented the securities lending proposal at the board meetings of LF Barbados and HF Barbados. [137] LF Barbados and HF Barbados implemented the same transactions as UF Barbados except

for the additional step of creating LF Luxembourg. [138] [ 130 ] In cross-examination, counsel for the Respondent took Mr. Fung to an e-mail from Mr. Farronato sent July 16, 2003 in which Mr. Farronato states that " “[a] transaction has arisen that requires physical Board of directors meetings for the three Barbados companies in Barbados” " . Mr. Fung stated that Mr. Farronato was not responsible for setting up the board meetings as E&Y in Barbados had been engaged as the secretary of the three companies. [ 131 ] Mr. Fung speculated that Mr. Sixt might have asked Mr. Farronato to arrange the board meetings. Mr.

Fung observed that the board meetings were being arranged around Mr. Sixt’s expected presence in Barbados on from July 21 to 22, 2003, and stated that board meetings would normally take place when Mr. Sixt was in Barbados. Mr. Fung agreed with counsel for the Respondent that Mr. Sixt was on almost all the boards of directors of the companies involved in the securities lending arrangements. [139] [ 132 ] Mr. Fung agreed with counsel for the Respondent that Mr. Sixt told him to attend the board meeting of July 22, 2003. Mr.

Fung stated that he had to get approvals before he could attend board meetings for the Barbados companies. [140] Mr. Fung then had the following exchange with counsel: Q. So he told you to go, and then you said can I go? Is that how it works? A. Normally we have the -- we will go to -- we will have to office or attend meetings, whenever it is necessary to do so. So I will advise the supervisor, Mr. Don Roberts, that I will be going, because it is required by the duties. Q. But you didn’t take time off from Hutchison Whampoa Limited? A. I don’t take a formal time off. Q. Okay. A.

So go work -- to go overseas to attend meetings. It is part of my duties. Q. Part of your duties as chief accountant of Hutchison Whampoa Limited; correct? A. Yes. But in this case, just like – I was also a director of UF, UF Barbados, and that is why I have the duty to attend. I was representing the company or the group. [141] [ 133 ] Counsel for the Respondent asked Mr. Fung about several of the directors, all of whom are identified in Appendix " “A” " of the PASF. Mr. Fung stated that Mr. Sng and Ms. Yao had no role with HWL, that Ms. Mahabir was a lawyer in Barbados and that Mr.

Weed was in the internal audit group at HWL and was based in the United States. [142] Mr. Fung did not remember whether he was present while the meeting of the managers of LF Luxembourg took place. [143] [ 134 ] Counsel for the Respondent suggested that on the basis of the times stated in the board minutes, there was insufficient time to consider the proposed securities lending arrangements before approving them. Mr. Fung stated that draft minutes were circulated prior to the meetings and that the directors went through the draft minutes point by point before approving the proposed transactions. [ 135 ] Mr.

Fung repeatedly denied that the board-level decisions had been made prior to the meetings and stated that although he thought it would be appropriate for the Barbados companies to proceed with the transactions, he was not in a position to know what the other directors would do at the meetings. [144] Mr. Fung did not recall when the draft minutes were circulated and was not able to point to such documents in the productions. [145] [ 136 ] Mr. Fung testified that the base currency of the securities lending arrangements was Canadian dollars because Husky declared dividends in Canadian dollars.

However, Husky paid the Dividends to LF Luxembourg in United States dollars. The compensation payment was also in United States dollars and was equal to the gross amount of the relevant dividends. [146] [ 137 ] Mr. Fung testified that the parties to the securities lending arrangements followed the terms and procedures in the securities lending arrangements as stated in the offshore securities lending agreements. [147] Mr. Fung stated that there were no restrictions on the voting rights transferred under these agreements. [148] [ 138 ] Mr.

Fung signed an irrevocable power of attorney dated July 24, 2003 for each of LF Barbados and HF Barbados to transfer their respective common shares in Husky to LF Luxembourg and for UF Barbados to transfer its common shares in Husky to HWEI. The powers of attorney were guaranteed by CIBC. [149] [ 139 ] Mr. Fung also signed two Directions to Computershare Trust Company, Inc., dated July 25, 2003.

The first Direction was to issue and register in the name of LF Luxembourg two share certificates—one for 137,576,366 common shares of Husky and the other for 14,953,953 common shares of Husky —representing the common shares of Husky transferred by LF Barbados and HF Barbados, respectively, to LF Luxembourg under the securities lending arrangements. The second Direction was to issue and register a share certificate for 146,548,737 common shares of Husky in the name of HWEI representing the common shares of Husky transferred by UF Barbados to HWEI. [150] [ 140 ] Mr.

Fung testified that LF Barbados and HF Barbados renegotiated the interest rate on intercompany loans described in the PASF so that the interest expense of those companies would be sufficient to offset the compensation payments to be made by LF Luxembourg under the securities lending arrangements. [151] [ 141 ] Mr.

Fung testified that he prepared a spreadsheet titled " “Calculation of Daily Loan Balances” " that calculated the daily loan balances of UF Barbados, LF Barbados and HF Barbados as support for the calculation of the revised interest rates required to generate sufficient interest expense to set off the amount of the compensation payments to those companies. [152] [ 142 ] Mr. Fung also prepared the document found at tab 74 of the PASF for the same purpose. The minor variation in the interest rates stated in the documents is attributable to rounding. Mr.

Fung presented the document at tab 74 of the PASF to the boards of directors of UF

Barbados, LF Barbados and HF Barbados. The interest rates were reduced in 2004 because the Barbados tax authority did not challenge the treatment of the compensation payments as capital contributions and the Barbados companies had more than enough interest expense to shelter the quarterly dividends after 2003. [153] [ 143 ] In cross-examination, counsel for the Respondent took Mr.

Fung to a statement under the heading " “Refinancing” " in the minutes of the meeting of the board of directors of UF Barbados on July 22, 2003; this statement suggested that the major creditors may demand repayment of all outstanding loans if satisfactory changes to the financing terms were not made. Mr. Fung agreed with counsel that the statement was included in the minutes to justify to the Barbados tax authorities the increase in the interest rate on the intercompany debt. [154] [ 144 ] Counsel for the Respondent took Mr. Fung through a lengthy review of the Barbados tax returns and put to Mr.

Fung that the increased interest expense in the Barbados companies would have been sufficient to shelter the Dividends if received by the Barbados companies. Mr. Fung stated that this was the case only if the interest rate was not challenged, that there was a concern that the Barbados tax authorities would challenge the increased interest rate and that no calculations were done to determine the interest rate needed in such a scenario. [155] Mr. Fung repeatedly denied that he did not do the calculation because the plan was to reduce Canadian withholding tax. [156] [ 145 ] Mr.

Fung testified that UF Barbados, LF Barbados and HF Barbados received some second quarter dividends from Husky as a result of acquiring additional common shares of Husky after July 24, 2003. These shares were not part of the securities lending arrangements. [157] [ 146 ] Mr. Fung testified that one of his roles was to review the financial records of LF Luxembourg. In that capacity, he reviewed the financial statements of LF Luxembourg and some of the documents for the securities lending arrangements.

He also received copies of documents such as bank statements and letters in respect of the bank account of LF Luxembourg. [158] [ 147 ] Mr.

Fung testified that there were no restrictions on HWEI’s or LF Luxembourg’s use of the funds received from Husky as a result of the payment of the Dividends, and that UF Barbados, LF Barbados and HF Barbados had no access to these funds or to the bank accounts of HWEI and LF Luxembourg. [159] I note that while questions were asked about HF Barbados’ access to the dividends paid by Husky to LF Luxembourg, according to the PASF, HF Barbados ceased to exist as a separate legal entity on September 25, 2003, which is prior to the payment of the Dividends on October 1, 2003. [ 148 ] Mr.

Fung testified that no restrictions were placed on LF Luxembourg’s and HWEI’s use of the common shares of Husky borrowed under the securities lending arrangements. [160] [ 149 ] Mr. Fung testified that LF Luxembourg deposited the dividends received from Husky first with a branch of ING for the period from October 1 to 8, 2003 and then with a branch of CIBC.

The details are found in paragraphs 49 to 51 of the PASF and the accompanying documents. [161] [ 150 ] LF Luxembourg reported the interest on the term deposits in its Luxembourg tax return for 2003 and used the principal and interest together with a loan from Castle DT Finance to fund the compensation payment to New LF Barbados. [162] The loan from Castle DT Finance was needed to reimburse New LF Barbados for the

Part XIII tax withheld by Husky and to cover the appreciation in the Canadian dollar relative to the United States dollar during the term of the securities lending arrangements. Mr. Fung stated that the intent was to waive the loan from Castle DT Finance in 2003, but it was actually waived in 2009. [163] [ 151 ] Mr. Fung provided an explanation of the LF Luxembourg financial statements for the period from July 16, 2003 to December 31, 2004 and an explanation of the report and financial statements of New LF Barbados for the period ending December 31, 2003. [164] [ 152 ] Mr.

Fung testified that LF Luxembourg prepared its 2003 Luxembourg tax return on the basis of the Luxembourg tax ruling and that the Luxembourg tax authority accepted the return as filed. [165] The 2003 Barbados tax return of New LF Barbados was also accepted as filed. [166] [ 153 ] In cross-examination, Mr. Fung agreed with counsel for the Respondent that from the start, it was understood that LF Luxembourg would not be able to generate sufficient income to make up for the fact that the compensation payment to New LF Barbados included an amount equal to the

Part XIII tax withheld by Husky. Mr. Fung also agreed that the share lending agreement was entirely tax motivated. [167] [ 154 ] In cross-examination, Mr. Fung stated that there were no securities lending arrangements after 2003 because the loss from the interest expense in the Barbados corporations in 2003 was sufficient to shelter the dividend income in 2004, 2005 and 2006 and the companies had foreign tax credits. Mr.

Fung denied that the absence of securities lending arrangements after 2003 was because of a change in Canadian tax law and stated that it was clear from the accounts that the Barbados companies had sufficient interest expense. [168] [ 155 ] Mr. Fung testified that New LF Barbados and UF Barbados received special dividends from Husky in 2004, 2005 and 2007 and that there were no securities lending arrangements in those years because New LF Barbados and UF Barbados had sufficient interest expense to shelter the dividend income. [169] [ 156 ] Mr.

Fung testified that because the Li family had no employees in Luxembourg, the treasury department of CKHL dealt with the various financial transactions undertaken by LF Luxembourg. The records of these transactions were provided to Mr. Fung, who would have his assistant prepare the accounting records and the financial statements. The financial statements were then sent to the Luxembourg tax advisor who prepared financial statements conforming to Luxembourg accounting standards and the Luxembourg tax return and returned these statements and tax returns to Mr. Fung and his assistant for review. Mr.

Fung would then arrange the sign-off by the directors of LF Luxembourg. Mr. Fung stated that a similar process was followed for the Barbados companies. [170] [ 157 ] In cross-examination, Mr. Fung stated that the treasury functions of the treasury departments of CKHL and HWL were similar but that the treasury department of CKHL would look after the cash received and cash payments for Mr. Li Ka-shing and his trusts and that the treasury department of HWL would look after the same for UF Barbados and HWEI. [171]

b) Evidence of Mr. Kenneth Albert Cameron and Ms. Laurie Marie Wills [172] [ 158 ] Mr. Cameron testified that he was one of two CRA auditors involved with the assessments under appeal and that the second CRA auditor was Ms. Laurie Will

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