DOW CHEMICAL CANADA ULC, Appellant, v. HER MAJESTY THE QUEEN,, 2020 TCC 139

Docket: 2017-2616(IT)G BETWEEN: DOW CHEMICAL CANADA ULC, Appellant, and HER MAJESTY THE QUEEN, Respondent . Application heard on May 14, 2019 at Toronto, Ontario and submissions in writing received on January 10, 2020, January 31, 2020 and February 14, 2020, pursuant to

section 58 of the Tax Court of Canada Rules (General Procedure) Before: The Honourable Justice K.A.

Siobhan Monaghan Participants : Counsel for the Appellant: Daniel Sandler Allison Blackler Counsel for the Respondent: Henry Gluch Samantha Hurst Aleksandrs Zemdegs ORDER UPON the Appellant filing an application, on consent, on October 23, 2018, seeking an order for a determination of the following question of law before the hearing of the appeal pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) : Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act (“ ITA ”) to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under

section 12 of the Tax Court of Canada Act and

section 171 of the ITA ? AND IN ACCORDANCE with the attached Reasons for Order; 1 . The Court has determined that where the Minister has decided, pursuant to subsection 247(10) of the Income Tax Act ( Canada ) [the " ITA " " ] " , to deny a taxpayer’s request for a downward transfer pricing adjustment, that decision is not outside the exclusive original jurisdiction granted to the Court under

section 12 of the Tax Court of Canada Act and

section 171 of the ITA provided that the assessment resulting from that decision has been properly appealed to the Court; and 2 . Each party shall bear its own costs with respect to this Application. Signed at Ottawa, Canada, this 18 th day of December 2020. “K.A. Siobhan Monaghan” Monaghan J. Citation: 2020 TCC 139 Date: 20201218 Docket: 2017-2616(IT)G BETWEEN: DOW CHEMICAL CANADA ULC,

Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR ORDER Monaghan J. I. INTRODUCTION [ 1 ] This decision is about the jurisdiction of the Tax Court of Canada [the Tax Court ], or perhaps more accurately about the scope of an appeal of an assessment. It arises in the context of an appeal by Dow Chemical Canada ULC [the Appellant or Dow Chemical ] of a reassessment of its 2006 taxation year. The reassessment increased Dow Chemical’s income under the transfer pricing provisions in

section 247 of the Income Tax Act . [1] [ 2 ] Where the relevant conditions are satisfied, the transfer pricing provisions mandate adjustments to amounts that increase a taxpayer’s income (or decrease a taxpayer’s loss).

However, adjustments that would decrease a taxpayer’s income (or increase a taxpayer’s loss) cannot be made unless " “in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made” " . [ 3 ] In reassessing Dow Chemical for its 2006 and 2007 taxation years, the Minister increased Dow Chemical’s income in respect of certain transactions with non-residents to which Dow Chemical is related.

The Minister initially indicated that the transfer pricing provisions also would result in a downward adjustment to Dow Chemical’s income in those taxation years in respect of another transaction. However, the most recent reassessment of Dow Chemical’s 2006 taxation year did not reflect the downward adjustment, although the reassessment of its 2007 taxation year did. Dow Chemical has appealed the 2006 reassessment. [ 4 ] The appeal raised two issues associated with the downward adjustment. The parties apparently resolved the first.

The second concerns the Minister’s decision to deny Dow Chemical the benefit of the downward adjustment. While the amount of the adjustment is not in dispute, the Minister, as she is entitled to do, determined that it is not appropriate in the circumstances to give effect to the adjustment. The dispute concerns whether that determination was proper. [ 5 ] The issue faced by Dow Chemical is where to bring the remaining issue in dispute. The Tax Court has the jurisdiction to consider an appeal of an assessment.

The Federal Court has jurisdiction to judicially review a decision of the Minister, but only if the matter is not otherwise appealable. The uncertainty concerning the proper forum for the dispute led the parties to submit a question of law to the Tax Court under

section 58 of the Tax Court of Canada Rules (General Procedure) [ Rule 58 ]. This decision addresses that question. II. CONTEXT A. The Transfer Pricing Provisions in

Part XVI.1 of the ITA [ 6 ]

Part XVI.1 of the ITA contains the transfer pricing provisions.

Part XVI.1 does not create or impose a separate tax (although it does impose a penalty). Rather, the transfer pricing provisions (with the exception of the penalty provision) are rules applied to compute amounts relevant to tax imposed under other Parts of the ITA , particularly (but not exclusively)

Part I. [ 7 ] The transfer pricing provisions in

Part XVI.1 of the ITA embody the " “arm’s length principle” " in transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length. Where transactions between a taxpayer and a non-arm’s length non-resident occur on terms that do not reflect arm’s length terms, subsection 247(2) mandates that amounts be increased or decreased as necessary to reflect the amounts that would have been agreed to had the parties been dealing with each other at arm’s length. [ 8 ] Read alone, subsection 247(2) makes no distinction between adjustments that increase a taxpayer’s income and those that decrease a taxpayer’s income: . . . any amounts that, but for this

section and

section 245, would be determined for the purposes of this Act in respect of the taxpayer . . . for a taxation year . . . shall be adjusted (in this

section referred to as an “adjustment”) to the quantum or nature of the amounts that would have been determined if [the participants had been at arm’s length] . . . [ 9 ] However, subsection 247(10) expressly precludes any adjustment under subsection 247(2) that does not result in or increase a transfer pricing capital adjustment or a transfer pricing income adjustment for a taxation year unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made. [ 10 ] Transfer pricing capital adjustments and transfer pricing income adjustments both result in an increase in a taxpayer’s income or a decrease in the taxpayer’s loss. [2] They are mandated.

In contrast, transfer pricing income setoff adjustments and transfer pricing capital setoff adjustments both result in a decrease in income or an increase in loss. [3] They cannot be made unless the Minister is of the opinion that it would be appropriate in the circumstances to make the adjustment. Nonetheless, both subsection 247(2) and 247(10) are rules that are to be applied to compute income (or some other relevant amount), and thus tax (or some other liability) under

Part I (or

some other Part) of the ITA . [ 11 ] Dow Chemical’s appeal concerns only a transfer pricing income setoff adjustment – interest expense. For purposes of these reasons, consistent with the terminology the parties used, the term “downward transfer pricing adjustment” refers to a transfer pricing income setoff adjustment or transfer pricing capital setoff adjustment. B. The Underlying Appeal [ 12 ] The parties filed a Statement of Agreed Facts, which I have attached to these reasons as Appendix A.

However, I have summarized what I view as the salient facts here. [ 13 ] The Appellant, Dow Chemical, is a Canadian resident company governed by the Companies Act (Nova Scotia) [4] and indirectly owned by The Dow Chemical Company, a US corporation [ Dow US ]. The Appellant, as borrower, entered into a revolving loan agreement dated February 17, 2009, effective January 1, 2004, with Dow Europe GmbH [ DowEur] , as lender. DowEur is a Swiss operating company also indirectly owned by Dow US.

Pursuant to that loan agreement, the Appellant was obliged to pay DowEur interest of $15,279,034 in respect of the Appellant’s 2006 taxation year, and interest of $6,694,341 in respect of its 2007 taxation year. [ 14 ] In 2011, the Minister reassessed the Appellant’s 2006 and 2007 taxation years relying on the provisions of

section 247 . The 2011 reassessment of the 2006 taxation year increased the Appellant’s income related to toll manufacturing services it provided to DowEur [ DowEur Manufacturing Amounts ]. The Appellant objected to that reassessment and requested the assistance of the Canadian competent authority with respect to the DowEur Manufacturing Amounts. The Appellant did not seek the assistance of the competent authority with respect to the DowEur loan. [ 15 ] Shortly thereafter, the Minister sent a proposal letter to the Appellant regarding downward transfer pricing adjustments.

In particular, the Minister proposed to increase the interest expense with respect to the DowEur loan by $3,260,704 for the Appellant’s 2006 taxation year and by $1,509,275 for its 2007 taxation year. However, subsequently the Minister advised the Appellant that the 2006 interest expense would not be changed because of a limitation period in the Canada-Switzerland Tax Treaty . [ 16 ] The Minister again reassessed the Appellant’s 2006 and 2007 taxation years by notices of reassessment dated December 12, 2012.

Those reassessments reflected an increase in the Appellant’s interest expense related to the DowEur loan for 2007, but not for 2006. However, the reassessment of the 2006 taxation year included transfer pricing adjustments that increased the Appellant’s income related to transactions it had with Dow US [the Dow US Amounts ].

The Appellant objected and requested the assistance of the Canadian competent authority in respect of the Dow US Amounts. [ 17 ] On January 14, 2013, the Appellant asked the Minister to make a downward transfer pricing adjustment for its 2006 taxation year related to the interest expense associated with the DowEur loan.

That request was denied on the basis that the additional interest was prohibited by Article 9(3) of the Canada-Switzerland Tax Treaty and would result in the amount not being taxed in either jurisdiction (i.e., double non-taxation). [ 18 ] Subsequently, the Minister reassessed: 1 . the Appellant’s 2006 taxation year, by notice dated December 14, 2015, in accordance with the resolution of the transfer pricing adjustments by the Canadian and Swiss competent authorities regarding the DowEur Manufacturing Amounts, but made no adjustment in respect of the DowEur loan; and 2 . the Appellant’s 2006 taxation year, by notice dated April 13, 2017, in accordance with the resolution of the transfer pricing adjustments by the Canadian and US competent authorities regarding the Dow US Amounts, but again made no adjustment in respect of the DowEur loan. [ 19 ] The April 13, 2017 reassessment of the 2006 taxation year has been appealed to the Tax Court and has given rise to the question addressed in this decision. [ 20 ] While the Appellant’s notice of appeal challenged the Minister’s view of Article 9(3) of the Canada-Switzerland Tax Treaty , I understand that the parties have resolved that issue.

The amount of the downward transfer pricing adjustment is not in dispute. Accordingly, the only remaining issue relates to the Minister’s determination under subsection 247(10) that it would not be appropriate in the circumstances to increase the Appellant’s interest expense for its 2006 taxation year by $3,260,704. The Appellant states that that determination was not proper and that therefore the reassessment is incorrect. III.

THE QUESTION [ 21 ] The parties have relied on Rule 58 for a determination of the following question: Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act (“ ITA ”) to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under

section 12 of the Tax Court of Canada Act and

section 171 of the ITA ? [ 22 ] In essence, the question is whether a challenge to the Minister’s exercise of the discretion given to her under subsection 247(10) falls within the Tax Court’s appellate jurisdiction or is outside of that jurisdiction and is a matter for judicial review in the Federal Court. [ 23 ] Before I proceed, I want to comment on the word " “discretion” " . That word is not used in subsection 247(10) , but it is used in the question before me and is used repeatedly in the jurisprudence. However, the term " “power” " or " “discretionary power” " or " “decision” "

or " “determination” " might equally be used – under subsection 247(10), the Minister is given the power to determine whether a downward transfer pricing adjustment is appropriate in the circumstances. In these reasons, I may use " “power” " , " “discretion”, " " “discretionary power” " , " “decision” " , " “determination” " or " “opinion” " to refer to the Minister’s action taken under subsection 247(10).

What is intended by each of these expressions is that the Minister has the power (and the obligation) to determine if the downward transfer pricing adjustment is appropriate in the circumstances and that, in the context of a downward transfer pricing adjustment, what matters is the Minister’s opinion. IV.

THE POSITIONS OF THE PARTIES [ 24 ] The Respondent seeks an affirmative answer to the question, advocating that any review of the Minister’s decision is beyond the jurisdiction of the Tax Court although it may be the subject of judicial review in the Federal Court. [ 25 ] The Appellant seeks a negative answer, arguing that, properly viewed, a challenge to the Minister’s decision under subsection 247(10) is an appeal of the assessment [5] that reflects that decision and therefore is within the exclusive appellate jurisdiction of the Tax Court. [ 26 ] The circumstances illustrate the dilemma faced by the Appellant: is the Tax Court or the Federal Court the proper forum for the dispute regarding the Minister’s exercise of her discretionary power?

Notwithstanding that the Appellant asserts that the Tax Court has the jurisdiction, the Appellant has sought judicial review of the Minister’s decision before the Federal Court. That proceeding is being held in abeyance pending a determination of the question in this case. [ 27 ] Assessments issued under the ITA can be appealed only to the Tax Court; the Tax Court has the exclusive original jurisdiction to hear appeals of assessments.

It is equally clear that the Federal Court has the jurisdiction to consider applications for judicial review, including decisions of the Minister or employees of the Canada Revenue Agency, but only to the extent that

an Act of Parliament does not provide for an appeal to another body, including the Tax Court. [ 28 ] Therefore, the answer to the question turns on whether the Minister’s decision under subsection 247(10) goes to the correctness of the assessment and so is properly the subject of an appeal to the Tax Court – the position taken by the Appellant – or whether any challenge to the Minister’s decision under subsection 247(10) must be by way of judicial review in the Federal Court – the position taken by the Respondent. V.

THE ANSWER [ 29 ] For the reasons that follow, I have decided that the answer to the question is no.

In my view, the Minister’s decision under subsection 247(10) is an essential component of the assessment, goes to the correctness of the assessment, and accordingly may be reviewed by the Tax Court under its exclusive appellate jurisdiction to determine the correctness of the assessment (i.e., whether the assessment is supported by the facts and applicable law). [6] I believe this conclusion is entirely consistent with the jurisprudence, the statutory provisions, and the remedies available to the Tax Court once it reaches a decision on an appeal of an assessment. [ 30 ] However, this is not to say that the Tax Court may substitute its opinion for that of the Minister.

That question is not before me. While much of the jurisprudence reviewed below suggests that the Tax Court may not (because Parliament intended the decision to be that of the Minister), that approach was not applied universally. Moreover, more recent jurisprudence, including from the Supreme Court of Canada [7] and the Federal Court of Appeal, has considered courts’ powers and duties when reviewing discretionary decisions. This jurisprudence would clearly be relevant to that question.

These reasons should not be interpreted as expressing any conclusion on whether the Tax Court may substitute its decision for that of the Minister when the Tax Court reviews the Minister’s decision under subsection 247(10) in the context of an appeal of an assessment resulting from that decision. VI. DOES SUBSECTION 247(11) PROVIDE THE RIGHT TO APPEAL THE MINISTER’S DECISION? [ 31 ] In support of its argument that the ministerial decision under subsection 247(10) is appealable to the Tax Court, the Appellant relies in part on subsection 247(11). Subsection 247(11) states:

(11) Sections 152, 158, 159, 162 to 167 and Division J of

Part I apply to this Part, with such modifications as the circumstances require. [ 32 ] Division I of

Part I is titled " “Returns, Assessments, Payment and Appeals” " , and Division J of

Part I is titled " “Appeals to the Tax Court of Canada and the Federal Court of Appeal” " . [ 33 ] Provisions of this nature are found throughout the ITA . For ease of reference, I will refer to them as mutatis mutandis provisions, while acknowledging that that traditional language is no longer used in the ITA . The purpose of these provisions in the ITA is to provide the same rights to object to and appeal assessments issued in reliance on Parts of the ITA other than

Part I without replicating all of the provisions in each of those other Parts of the ITA . [ 34 ] The Respondent asserts that subsection 247(11) is relevant only to an assessment of penalties under subsection 247(3), because the only assessment that can be made under

Part XVI.1 is an assessment of penalties under subsection 247(3). Any other assessment relying on the transfer pricing provisions is made pursuant to another Part of the ITA .

[ 35 ] The Appellant argues that subsection 247(11) has a broader application than to accommodate the appeal of a penalty assessed under subsection 247(3). The Appellant suggests that subsection 247(11) was drafted to apply to all of

Part XVI.1 (the provisions are stated to apply " “to this Part” " ) and to ensure that the objection and appeals process in

Part I is available to challenge all of the Minister’s actions under the transfer pricing rules, including the Minister’s decision to deny a downward transfer pricing adjustment under subsection 247(10). The Appellant submits that the references to subsections 162 to 167 and Division J in subsection 247(11) bring the Minister’s discretionary decision within the Tax Court’s appellate jurisdiction. [ 36 ] In advancing this position, the Appellant’s largely relies on two arguments: 1 .

The phrase " “with such modifications as the circumstances require” " permits the provisions adopted by subsection 247(11) to be read as if the reference to assessment or notice of assessment referred to " “the Minister’s decision regarding a downward transfer pricing adjustment pursuant to subsection 247(10)” " ; and 2 . Subsection 247(11) applies as of a date that precedes the application date for the penalty provision, indicating that its purpose includes providing taxpayers with the right to appeal all of the Minister’s actions under

Part XVI.1, including in particular her decision under subsection 247(10). [ 37 ] Provisions in the ITA must be interpreted using the textual, contextual and purposive principles described by the Supreme Court of Canada in Canada Trustco Mortgage Co. v.

Canada . [8] The language of a statutory provision is to be interpreted alongside its context and legislative purpose " “to find a meaning that is harmonious with the Act as a whole” " . [9] Where the words used are capable of more than one meaning, the ordinary meaning of the words, while relevant, will play a lesser role in the interpretive process than the context and purpose of the statutory provisions. The context includes not only the surrounding language (i.e., the language of the specific provision) but also the broader context of the related provisions and the ITA as a whole. A.

Substitution of “Decision of the Minister” for “Assessment” [ 38 ] Some mutatis mutandis provisions in the ITA use the phrase " “with any modifications” " while others use the phrase " “with such modifications” " . The Respondent submits that because subsection 247(11) allows only such modifications (rather than any modifications) as the circumstances require, the scope of subsection 247(11) is narrower than it might otherwise be. For the reasons the Appellant gives in its written submission, I am not convinced that the difference between the two expressions is meaningful in the circumstances before me.

However, it is not necessary for me to decide that question in this case. [ 39 ] In my view, neither expression would permit substituting " “the Minister’s decision denying a downward transfer pricing adjustment under subsection 247(10)” " for " “assessment” " or " “notice of assessment” " in the relevant provisions.

Had Parliament intended subsection 247(11) itself to extend rights of objection and appeal to the Minister’s decision as directly as the Appellant suggests, I would anticipate much clearer language such as appears in other mutatis mutandis provisions in the ITA . [ 40 ] For example, the ITA requires the Minister to make certain determinations; [10] the provisions governing notices of objection and rights of appeal expressly are made applicable to those determinations, leaving no doubt. [11] Similarly, where the Minister gives notice of an intention to revoke registration of a taxpayer as a qualified donee, the ITA specifies that the relevant provisions apply " “with any modifications that the circumstances require, as if the notice [of revocation] were a notice of assessment.” " [12] A similar approach is taken in

Part V to a notice of suspension [13] and in

Part X to a notice of refund. [14] These examples of explicit language support a narrower view of the modifications contemplated and permitted by subsection 247(11) than the Appellant advocates. [ 41 ] In coming to my conclusion on the Appellant’s first argument regarding the scope of subsection 247(11), I considered Lord Rothermere Donation v.

The Queen . [15] There the Tax Court said that the " “any modifications” " formulation of these provisions permits a broader range of substitutions or modifications than might have been permitted under a traditional " “mutatis mutandis” " provision, suggesting that the updated language could accommodate changes that went beyond " “a point of detail” " .

However, I view the substitution made there to be of an entirely different nature than that proposed here by the Appellant. [ 42 ] In that case, it is clear from the relevant mutatis mutandis provision that subsection 164(3) – which mandates interest on tax refunds - is incorporated by reference for purposes of a refund of

Part XIII taxes. [16] Subsection 164(3) requires identification of the date from which the interest is calculated. To apply subsection 164(3) to a non-resident, the Tax Court sought to identify something comparable to a return filed under

section 150 to identify the start of the relevant period. For that purpose, given the similarities in the effect of, and the information provided in, a

Part I tax return filed under

section 150 (giving rise to an assessment under

Part

I) and an application for a refund of

Part XIII taxes (the means by which a non-resident obtains an assessment of

Part XIII tax), the Tax Court concluded that it could treat the application for a refund as equivalent to a return filed under

section 150. [ 43 ] Those circumstances are not comparable to the circumstances here. Subsection 247(11) can have full effect without being applied as the Appellant has suggested; it applies to and is necessary to object to and appeal an assessment of a penalty. [ 44 ] I note that subsection 247(11) requires the Minister to decide whether a downward transfer pricing adjustment is appropriate in the circumstances, and that subsection 152(1.2) refers to a " “determination or redetermination”.

" While subsection 152(1.2) is a provision included among those referred to in subsection 247(11), I do not think this assists the Appellant. Subsection 152(1.2) is concerned with determinations of amounts (not decisions). Subsection 247(10) does not give the Minister the power to determine an amount and does not itself use the word " “determine” " or " “determination” " or refer to a " “notice of determination” " . [ 45 ] To read subsection 247(11) as the Appellant suggests would be to stray too far into the realm of legislating, rather than applying, the law. As stated by the Federal Court of Appeal in Zen v.

Canada (National Revenue) , [17] decided after Lord Rothermere : [73] A statutory modification provision confers an unusual power on courts. The normal role of the judicial branch of government with respect to legislation is to interpret and apply the law as enacted by the Legislature. A cornerstone of parliamentary democracy is that changes to the law require the authorization of the Legislature. However, the exigencies of

administration in the modern state have also long required Legislatures to delegate extensive law-making powers.

In Canada, these powers are most often delegated to politically accountable bodies and officials with an institutional expertise in public administration, such as the Governor (or Lieutenant Governor) in Council, individual Ministers of the Crown, and municipalities. [74] The fact that courts have neither of these qualities counsels a cautious approach to the scope of the power delegated to them to modify provisions of the ITA , and indicates that it should be interpreted more narrowly than the current text suggests.

Thus, determining whether a proposed modification is permitted by the delegated power (to use the terminology associated with mutatis mutandis : is it a change in detail or in substance?) requires a court to consider whether considerations of efficiency outweigh the benefits of subjecting it to the scrutiny of the normal legislative process. [Emphasis added.] [ 46 ] Finally, I have considered statements made in the context of the introduction of

Part XVI.1. While comments in budget statements or explanatory notes that accompany draft legislation are not dispositive, they may provide insight into Parliament’s intention.

Nowhere in the 1997 Budget Message, [18] the explanatory notes accompanying the draft legislation released on September 11, 1997, [19] or the explanatory notes accompanying the revised draft legislation released on December 8, 1997, [20] is there any suggestion that the mutatis mutandis provision in the transfer pricing rules was intended to allow the reading that the Appellant suggests. [ 47 ] Thus, while the text of subsection 247(11) is broad (leaving aside the " “any/such” " debate), it nonetheless must be read and applied narrowly in the context of legislation that circumscribes the jurisdiction of the Tax Court as the ITA does.

Other provisions in the ITA that expressly direct that the reference to " “notice of assessment” " be read as a reference to something else – an approach not taken in subsection 247(11) – support that conclusion. In my view the text and context of subsection 247(11), interpreted under the Canada Trustco principles, do not support the Appellant’s position that " “decision of the Minister” " may be substituted for " “assessment” " or " “notice of assessment” " in applying the sections referred to in subsection 247(11). B. Purpose of Subsection 247(11)

(1) Date of Application [ 48 ] Amendments to the transfer pricing rules were announced in the February 1997 Budget. While the rules in

section 247 were not enacted until 1998, [21] from enactment, most of the provisions in

section 247 , [22] including subsection (11), were made applicable for taxation years or fiscal periods that began after 1997. However, the penalty provision in subsection 247(3), and the related provisions in subsections 247(4), (5) and (9) [collectively, the penalty-related provisions] , were applicable only for taxation years and fiscal periods that began after 1998. [ 49 ] The Appellant argues that if subsection 247(11) is intended to be restricted to an assessment of penalties, one would expect it to become applicable contemporaneously with the penalty-related provisions.

The earlier application date was chosen, suggests the Appellant, so that a taxpayer could dispute a decision by the Minister to deny a downward transfer pricing adjustment under subsection 247(10). [ 50 ] The Appellant points out that in the initial publicly-released draft transfer pricing provisions, the mutatis mutandis provision appeared as subsection (3) of proposed

section 247.1. All of proposed

section 247.1 related to the proposed penalties in proposed

section 247. Proposed subsection 247.1(1) set out the time for payment of the penalty and proposed subsection 247.1(2) imposed interest on a penalty not paid by the due date. The mutatis mutandis provision in proposed subsection 247.1(3) was to apply contemporaneously with the application of the transfer pricing provisions other than the penalty-related provisions. In contrast, the first two subsections of

section 247.1 (related to payment of and interest on the penalty) were to become applicable contemporaneously with the penalty-related provisions. [ 51 ] This distinction between the application dates within proposed

section 247.1 itself, the Appellant asserts, supports its position that the scope of subsection 247(11) is broader than to permit an objection to and appeal of the assessment of a penalty. Had Parliament intended the mutatis mutandis provision to be relevant to the penalty only, the Appellant submits, all three parts of

section 247.1 would have been proposed to become applicable at the same time – on the date the penalty itself was proposed to become applicable. [ 52 ] The Respondent’s position is that subsection 247(11) applies only to an assessment under

Part XVI.1. Only penalties may be assessed under

Part XVI.1 and accordingly, says the Respondent, subsection 247(11) applies only to an assessment of penalties. [23] [ 53 ] The Respondent submits that draft legislation that was not enacted should be viewed with caution. Moreover, while the commentary does not explain why a provision that the Respondent asserts applies only to penalties was made applicable before the penalties could be assessed, the Respondent submits that the delay in the application date of the penalty-related provisions was an exception to the application date for all of the other transfer pricing provisions.

The penalty applies where a taxpayer has not satisfied what (then) were new contemporaneous documentation obligations. The Respondent suggests that the purpose of the delay was to give taxpayers time to adjust to the new requirements before penalties became applicable. [ 54 ] The Respondent points out that the earlier application date for subsection 247(11), a provision the Respondent argues relates only to assessments of penalties under

section 247, also extends to

definitions in subsection 247(1) relevant only to the penalty-related provisions. Although subsection 247(11), like those

definitions, applied for taxation years and fiscal periods that began after 1997, no delay in their application was necessary because they imposed no obligations on taxpayers. Although applicable, these provisions could have no consequence unless and until the penalty-related provisions became applicable (i.e., to a taxation year or fiscal period commencing after 1998). [ 55 ] The explanatory notes dated September 11, 1997 that accompanied the draft legislative proposals do not address this difference in proposed application dates for draft

section 247.1. Similarly, the explanatory notes that accompanied the December 8, 1997 draft

legislation (the version of

section 247 that ultimately was enacted) is similarly silent on why subsection 247(11) applied from a date earlier than the penalty provisions. [ 56 ] Although the distinction in dates of application may be viewed as supporting the Appellant’s view of the purpose of subsection 247(11), I am not prepared to conclude that that view is correct solely on that basis. Rather, this distinction suggests to me that it is necessary to consider the purpose of subsection 247(11) by interpreting it in the context of the other provisions in

Part XVI.1 and in the context of the ITA as a whole.

(2) Assessments Based on the Transfer Pricing Provisions [ 57 ] With the exception of any penalty assessed under subsection 247(3), an assessment based on the provisions of

section 247 will be made pursuant to another Part of the ITA , most notably

Part I or

Part XIII. [24] For example, a transfer pricing adjustment may result in an increase to a taxpayer’s income and a reassessment reflecting that increase will be issued under

Part I. Subparagraph 152(4)(b)(iii) specifically contemplates a longer period of reassessment for transactions subject to the transfer pricing provisions. Because the assessment is issued under

Part I, the provisions in

Part I governing objection and appeal of that assessment automatically apply. Subsection 247(11) has no role to play. [ 58 ] In this respect,

Part XVI.1 operates like

Part XVI. That

Part contains the general anti-avoidance rule [the GAAR [25] ] and a benefit provision which, when applicable, applies to add the benefit to income for purposes of

Part I or to treat the benefit as a payment to a non- resident for purposes of

Part XIII. Like the transfer pricing provisions,

Part XVI does not impose tax but rather contains rules that are applied for the purpose of computing liability under other Parts of the ITA . Where those rules apply, as with the transfer pricing provisions, adjustments are made that affect computations under other Parts of the ITA . Accordingly, the assessment based on the application of the rules in

Part XVI arises under the other Part of the ITA . [ 59 ] With respect to the GAAR this is made abundantly clear. Subsection 245(7) states that: " . . . the tax consequences to any person, following the application of this

section [245], shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this

section . " [Emphasis added.] [ 60 ] The assessment is made following the application of the GAAR but is made under the appropriate Part of the ITA , not

Part XVI. Similarly, an assessment made following the application of subsection 247(2) and (10) is made not under

Part XVI.1, but under the appropriate Part of the ITA . [ 61 ] Where a particular person has been reassessed with respect to a transaction, or has received a notice of determination under subsection 152(1.11), involving the application of the GAAR, another person may ask the Minister to assess, or make a determination under subsection 152(1.11), with respect to that same transaction. [26] In that event, the Minister must consider the request and assess or make a determination. [27] The obligation to make the assessment is found in

Part XVI, but again the assessment would be made under another Part of the ITA . [ 62 ] Despite these specific provisions addressing assessments based on

section 245,

Part XVI does not contain a mutatis mutandis provision. None is necessary because an assessment made consequential on the application of the provisions in

Part XVI is not made under

Part XVI, but is made under another Part. [28] The right to object to or appeal that assessment is found in that other Part. Similarly, where the Minister makes a determination under subsection 152(1.11), following the application of

section 245, the taxpayer’s right to object and appeal are found in

Part I. [29] [ 63 ] With two exceptions, the Appellant agrees with this analysis. The Appellant agrees that an adjustment to income based on subsection 247(2) or (10) would be processed as an adjustment to income determined and assessed under

Part I and that the objections and appeals provisions in

Part I would govern. However, the Appellant states that the " “reasons for the objection” " and the " “issue to be decided” " would relate solely to

Part XVI.1, where the substantive dispute is grounded. While that may be true, that is not different than an assessment based on the GAAR or on

section 246. The reason for the objection and the issue to be decided would be grounded, at least in part, in

Part XVI – for example, is there a tax benefit, is there an avoidance transaction, what are the reasonable tax consequences to deny the tax benefit, and has a benefit been conferred, directly or indirectly, on a taxpayer? [ 64 ] The Appellant argues that the difference between

Part XVI and

Part XVI.1 is not only that

Part XVI does not have a penalty provision but that

Part XVI does not have a provision that relies on the Minister’s exercise of a discretion. That, says the Appellant, is one of the reasons it does not have a mutatis mutandis provision. I do not agree that that distinction is meaningful in the context of the Appellant’s argument that subsection 247(11) allows the Minister’s decision to be the subject of an appeal. [ 65 ] Subsection 247(10) requires a decision, but so does subsection 245(2). Under subsection 247(10) the Minister must decide whether, in her opinion, a downward transfer pricing adjustment is appropriate in the circumstances.

Under subsection 245(2), the Minister must decide what tax consequences are reasonable in the circumstances in order to deny a tax benefit.

While in the former case the Minister’s opinion is the one that matters, and in the latter the Tax Court may come to a different conclusion regarding the reasonable tax consequences than the Minister, in both cases the Minister’s decision results in an assessment under another Part of the ITA . [ 66 ] The second distinction between Parts XVI and XVI.1, says the Appellant, is that in some circumstances the Minister’s refusal to make a downward transfer pricing adjustment will not result in a reassessment, but a decision letter.

In such circumstances, unless subsection 247(11) is read as extending the right of appeal to the Minister’s decision letter, argues the Appellant, a taxpayer would have to seek a judicial review, even though another taxpayer who is in the same circumstances but who has received a reassessment would be able to appeal the reassessment to the Tax Court. Therefore, to avoid what the Appellant calls an absurdity, the purpose of subsection 247(11) should be seen as extending the right to object or appeal found in

Part I to the Minister’s decision under subsection 247(10),

regardless of whether that decision is reflected in an assessment. [ 67 ] With respect, I am not persuaded by this argument either. It seems likely to me that a downward transfer pricing adjustment would arise only in the context of an audit, or a reassessment or perhaps a taxpayer’s request for an adjustment because of one made under transfer pricing rules in another foreign jurisdiction.

It seems unlikely to arise because the Minister chooses to review a transaction in isolation and to send a letter to a taxpayer stating that a downward transfer pricing adjustment was identified but will not be made. [ 68 ] Nonetheless, if such a circumstance arises, and there is no appeal to the Tax Court because there is no assessment, I agree that the taxpayer’s only recourse may be to seek judicial review of the Minister’s decision in the Federal Court. But that so-called absurdity is not peculiar to a downward transfer pricing adjustment.

In many circumstances an aggrieved taxpayer does not have a right of appeal.

In some, a taxpayer unable to appeal an assessment [30] has been permitted to seek judicial review. [31] In other circumstances, a taxpayer may not be able to appeal because the result is a notice of no tax payable (i.e., a nil assessment), requiring the taxpayer to wait until a taxation year in which the amount is relevant (e.g., as part of a non-capital loss). [ 69 ] Thus, this limitation on a taxpayer’s rights to challenge the decision does not persuade me that the purpose of subsection 247(11) is to permit an appeal of the Minister’s decision under subsection 247(10) absent an assessment reflecting that decision. [ 70 ] In my view, both the similarities and the differences between

Part XVI.1 and

Part XVI support the conclusion that the only purpose of subsection 247(11) is to permit assessments of penalties under subsection 247(3) and objections to and appeals from those assessments. As with the GAAR, any assessment based on the application of subsections 247(2) and (10), and the rights to object to and appeal from the assessment, arise elsewhere.

(3) Comparison with Other Mutatis Mutandis Provisions [ 71 ] Every Part of the ITA that imposes tax or a penalty [32] allows for an appeal. Typically [33] these Parts contain a mutatis mutandis provision similar to subsection 247(11), that makes Division I (or parts of it) and Division J of

Part I applicable for purposes of the relevant Part. While Division J (dealing with appeals to a court) invariably is made applicable in its entirety, the parts of Division I made applicable by the relevant mutatis mutandis provision vary. Sometimes specific provisions are identified, as in subsection 247(11), while in other circumstances all of Division I is identified, [34] notwithstanding that many parts of Division I would be irrelevant to an assessment under the relevant Part. [ 72 ] These variances sometimes may be explained by other provisions in the relevant Part or the purpose the Part serves.

For example, Parts IV.1, VI.1, X.1 and X.2 each contains a provision imposing an obligation to file a return. Their mutatis mutandis provisions do not incorporate subsection 150(1) – requiring a return under

Part I – but sometimes incorporate subsections 150(2) and (3), entitling the Minister to demand a return and obliging certain representatives to file a return. [35] However, all incorporate at least parts of

section 152 – obliging the Minister to issue an assessment after a return is filed and deeming a reassessment to be valid and binding, subject to being varied or vacated on an objection or appeal and subject to a reassessment. [ 73 ] In contrast, Parts XIII.1 and XIV, which impose branch taxes, themselves contain no provision requiring a return. But, their mutatis mutandis provision refers to

section 150 in its entirety, presumably thereby including the obligation to file a return with the same deadlines as provided for in

Part I. And, of course, they refer to

section 152 as well. [ 74 ]

Part III does not impose an obligation to file a return, and its mutatis mutandis provision does not incorporate any part of

section 150 (related to return filing) or subsection 152(1), obliging the Minister to assess a return. Rather,

Part III imposes an obligation on the Minister to assess the tax payable under

Part III after receiving the capital dividend election or other relevant election. Thus, the obligation to issue an assessment is found within

Part III itself. The mutatis mutandis provision in

Part III provides for an objection to and appeal of any such assessment by incorporating by reference other relevant provisions from Division I and all of Division J. [ 75 ] While most Parts of the ITA that impose tax or penalties provide that one or more of sections 150, 151, 153 and 161 (or some parts of those provisions) apply, subsection 247(11) does not. This makes sense because assessments under

Part XVI.1 are limited to assessments of the penalty provided for in subsection 247(3). A return reporting a penalty is not required to be filed. Any other assessment that arises because of a transfer pricing adjustment is made under another part of the ITA . [ 76 ] Subsection 247(11) refers to sections 152, 158, 159 and 162 to 167 from Division I.

Section 152 deals with assessments and so is relevant to the assessment of a penalty under

section 247. [36] And, because

Part XVI.1 imposes a penalty that is assessed under

Part XVI.1, it is appropriate that a taxpayer be given rights to object to and appeal that assessment. With the exception of

section 162, dealing with penalties, all of the provisions referred to in subsection 247(11) have some relevance to the assessment of a penalty, and rights to object and appeal. That is, none of them suggest that they are referred to for any other reason, including to permit an objection to or appeal of the Minister’s decision under subsection 247(10). This is consistent with the consequence of the transfer pricing provisions, other than the penalty-related provisions, applying: the resulting assessment is not made under

Part XVI.1. [ 77 ] While the role

section 162 plays in an assessment of penalties under subsection 247(3) is unclear to me, the fact that it is referred to in subsection 247(11) does not change my view. Even if I accepted the Appellant’s position with respect to the expanded purpose of subsection 247(11),

section 162 is neither necessary nor any more relevant.

(4) Explanatory Notes [ 78 ] As noted above, explanatory notes or statements in the House of Commons may provide some guidance as to the purpose of the provision. The explanatory notes that accompanied subsection 247(11) are at best neutral as to whether the Appellant’s or Respondent’s position as to the purpose of subsection 247(11) is the better one. [37] They are certainly not sufficient to tip the balance in favour of the Appellant’s position.

(5) Conclusion on Purpose of Subsection 247(11)

[ 79 ] The Appellant relies on subsection 247(11) as supporting its position that the Tax Court has the jurisdiction to review the Minister’s decision under subsection 247(10). In particular, the Appellant argues that one of the purposes of subsection 247(11) is to permit a taxpayer to appeal the Minister’s decision under subsection 247(10) to deny a downward transfer pricing adjustment. I am satisfied that the purpose and scope of subsection 247(11) is limited to an assessment issued under

Part XVI.1 – which can only be an assessment of penalties – and that it does not extend to an assessment issued under another Part of the ITA relying on the application of the other transfer pricing provisions in

Part XVI.1. [ 80 ] Consequently, I have concluded that subsection 247(11) does not itself permit the Appellant to challenge the Minister’s decision under subsection 247(10). [ 81 ] If, as the Appellant submits, the Minister’s opinion formed under subsection 247(10) goes to the correctness of the assessment, the right to appeal that assessment already exists – in the Part of the ITA under which the assessment based on

section 247 is issued. In those circumstances, subsection 247(11) adds nothing. VII. THE TAX COURT’S APPELLATE JURISDICTION [ 82 ] I turn now to the Appellant’s second argument, that is, that the Minister’s decision regarding a downward transfer pricing adjustment goes to the correctness of an assessment. [ 83 ] An assessment is the process or operation undertaken by the Minister to confirm a taxpayer’s liability under the ITA .

The function of an assessment is to determine the tax, interest and penalties, if any, payable by a taxpayer. [ 84 ] The Appellant argues that the discretionary power given to the Minister under subsection 247(10) is unlike any other discretionary powers given to the Minister under the ITA because the taxpayer’s income, and therefore the tax, interest and penalties, if any, for which the taxpayer is liable, cannot be determined (assessed) until it has been exercised.

Where a downward transfer pricing adjustment is established, the Minister is mandated to determine whether, in her opinion, it is appropriate in the circumstances to make the downward transfer pricing adjustment. [ 85 ] The taxpayer has a right to appeal an assessment to the Tax Court. Therefore, argues the Appellant, the Tax Court’s function in considering the correctness of the assessment includes a review of the Minister’s decision regarding a downward transfer pricing adjustment. A.

Statutory Provisions Relevant to Jurisdiction in Income Tax Matters: Divided Jurisdiction [ 86 ] The Tax Court’s jurisdiction in income tax matters is limited by

section 12 of the Tax Court of Canada Act [38] and by the ITA .

Section 12 of the TCCA provides the Tax Court with “ " exclusive original jurisdiction to hear and determine references and appeals . . . on matters arising under " ” the ITA when provided for in the ITA .

Thus, in the context of issues arising under the ITA , the Tax Court’s jurisdiction is limited to what the ITA expressly provides. [ 87 ] The Tax Court may hear an appeal of an assessment, [39] a confirmation or redetermination of fair market value of a property that is an ecological gift, [40] and certain specific determinations made under the ITA . [41] The Tax Court also has jurisdiction to decide questions of fact, law or mixed questions of law and fact [42] and to hear applications for extensions to the time for filing a notice of objection or a notice of appeal. [43] [ 88 ] Jurisdiction over certain other issues arising under the ITA are within the exclusive jurisdiction of the Federal Court of Appeal, [44] and in such cases, neither the Tax Court nor the Federal Court has jurisdiction. [45] [ 89 ] Under the Federal Courts Act , [46] the Federal Court has jurisdiction to judicially review decisions or actions of a Minister having, exercising or purporting to exercise jurisdiction or powers conferred under

an Act of Parliament [47] unless

an Act of Parliament expressly provides for an appeal to another court or body. [48] The objective of this limitation on the Federal Court’s jurisdiction has been described as avoiding parallel proceedings in the Federal Court where a federal statute provides for an appeal in another forum. [49] [ 90 ] As the Supreme Court of Canada put it in Canada v. Addison & Leyen Ltd .: [50] " It is not disputed that the Minister belongs to the class of persons and entities that fall within the Federal Court’s jurisdiction under s. 18.5. Judicial review is available provided the matter is not otherwise appealable .

" [Emphasis added.] [ 91 ] The qualification at the end of this passage goes to the heart of this case. To the extent a decision or order of the Minister cannot be appealed to the Tax Court or the Federal Court of Appeal, it may be subject to judicial review in the Federal Court. [51] However, it is equally true that if the matter can be appealed to the Tax Court, it is outside the Federal Court’s jurisdiction. [ 92 ] The relevant statutory language in

section 18.5 of the FC Act , with particular relevance to an appeal under the ITA is worthy of careful consideration: " . . . if

an Act of Parliament [the ITA ] expressly provides for an appeal to . . . the Tax Court of Canada . . . from a decision or an order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except in accordance with that Act. "

[Emphasis added.] [ 93 ]

Section 18.5 of the FC Act does not distinguish between decisions arising because of the exercise of a discretionary power or by virtue of some other decision-making power. The ITA contains many provisions under which the Minister makes a decision before an assessment is issued. Some of those decisions can be challenged in the Tax Court on an appeal of the resulting assessment, and some cannot. [ 94 ] Subsection 247(10) requires the Minister to make a decision. So, the question is whether that decision is one from which the ITA provides for an appeal to the Tax Court.

If it does, then the Federal Court has no jurisdiction. B. What about Parallel Proceedings? [ 95 ] In Canada (National Revenue) v. Sifto Canada Corp. , [52] the Federal Court of Appeal recognized that the division of jurisdiction can result in parallel proceedings in the Tax Court and the Federal Court, or sometimes proceedings in the Tax Court followed by a judicial review application in the Federal Court.

While that may present challenges – including a decision as to which action should proceed first – that division is a function of Parliament’s decision to restrict the Tax Court’s jurisdiction in the way it has. [53] [ 96 ] On the other hand, the Federal Court of Appeal has cautioned that courts must consider the true nature of the claim. The following passage from JP Morgan is apt: Armed with sophisticated wordsmithing tools and cunning minds, skilful pleaders can make Tax Court matters sound like administrative law matters when they are nothing of the sort.

When those pleaders illegitimately succeed, they frustrate Parliament’s intention to have the Tax Court exclusively decide Tax Court matters. Therefore, in considering a motion to strike, the Court must read the notice of application with a view to understanding the real essence of the application. The Court must gain “a realistic appreciation” of the application’s “essential character” by reading it holistically and practically without fastening onto matters of form: Canada v . Domtar Inc. , 2009 FCA 218 at paragraph 28 ; Canada v . Roitman , 2006 FCA 266 at paragraph 16 ; Canada (Attorney General) v .

TeleZone Inc. , 2010 SCC 62 , [2010] 3 S.C.R. 585 at paragraph 78 . [54] [ 97 ] Although JP Morgan concerned a motion to strike, the principle outlined in this passage applies when determining whether an application for judicial review is in substance an appeal of the assessment. [55] [ 98 ] Many applications for judicial review of ministerial decisions have been dismissed on the basis that the application amounted to an attack on the validity or correctness of an assessment, something courts have repeatedly acknowledged is within the Tax Court’s jurisdiction. [56] And, the correctness of the assessment is not limited to a consideration of the amount or liability for tax but extends to " “the more fundamental question of the Minister’s legal authority to make the assessments.” " [57] That is, did the Minister properly understand or ascertain all of the relevant facts?

Did the Minister properly interpret and apply the law to the facts? [ 99 ] The question to be answered here is whether a challenge to the Minister’s decision under subsection 247(10) is an attack on the correctness of the resulting assessment (either in fact or law) and therefore is a matter for the Tax Court. C.

Historical Perspective [ 100 ] In considering this question, jurisprudence from the period during which the Exchequer Court had both appellate jurisdiction in tax matters and jurisdiction to review the actions of government ministers is illuminating. [ 101 ] The Income War Tax Act [58] provided for an appeal to the Exchequer Court of an assessment of taxes imposed under that statute. [ 102 ] In particular, a taxpayer dissatisfied with " “the amount at which he is assessed, or who considers that he is not liable to taxation” " under the IWTA first could appeal to the Minister setting out the reasons for the appeal and the relevant facts.

On receiving a notice of appeal, the Minister was obliged to consider it, either affirm or amend the appealed assessment, and notify the taxpayer of his decision in writing. Following receipt of the Minister’s decision, the taxpayer, if still dissatisfied, could appeal to the Exchequer Court by mailing a notice of dissatisfaction to the Minister, who was obliged to reply admitting or denying the facts alleged and confirming or amending the assessment.

Within two months after making the reply, the Minister was obliged to send documents relevant to the appeal, including the notice of dissatisfaction and the reply, to the Exchequer Court. Thereafter, the matter became an action in the Exchequer Court as an appeal. Failure to meet the timelines resulted in the right of appeal being lost. [59] [ 103 ] This process under the IWTA resembles the objection and appeal process that now exists in the ITA : a taxpayer dissatisfied with an assessment may file an objection with the Minister, who is obliged to reconsider the assessment and either vacate, confirm, or vary it.

A taxpayer who remains dissatisfied may appeal the assessment to the Tax Court.

Timelines are established and, if not met, an appeal may not be available. [ 104 ] Under the Exchequer Court Act , [60] the Exchequer Court had exclusive original jurisdiction in all cases in which relief was sought against any officer of the Crown for anything done or omitted to be done in the performance of his duty. [61] This jurisdiction is similar to the judicial review jurisdiction vested in the Federal Court under the FC Act . [ 105 ] The IWTA contained provisions related to the computation of income that depended on the Minister exercising a discretion (i.e., determining an amount).

Several appeals arose in which the matter in dispute was the Minister’s exercise of a discretion. The jurisprudence establishes that where the taxpayer’s complaint about an assessment under the IWTA was grounded in the Minister’s exercise of a discretion bestowed on him in the IWTA , the Exchequer Court’s appellate jurisdiction under the IWTA was engaged, rather than the Exchequer Court’s jurisdiction under the EC Act . Pioneer Laundry & Dry Cleaners Ltd. v. Minister of National Revenue [62] is

an early example of such a case. [ 106 ] In computing income for purposes of the IWTA , a taxpayer was not permitted any deduction for depreciation, depletion or obsolescence except as permitted by the IWTA . [63]

Section 5 of the IWTA provided for a deduction of " “such reasonable amount as the Minister, in his discretion, may allow for depreciation.” " In filing its tax return, Pioneer Laundry & Dry Cleaners Ltd. claimed depreciation in accordance with rates in a circular published by the Minister. The Minister disallowed the claim, did not allow the company any deduction for depreciation of machinery and equipment, and assessed the company accordingly. The company appealed. [ 107 ] The appeal failed at the Exchequer Court and the Supreme Court of Canada.

However, on further appeal, the Privy Council expressed agreement with the dissenting opinion of Davis J. and Chief Justice Duff of the Supreme Court of Canada: [64] that the taxpayer had a statutory right to an allowance; the Minister had a duty to fix a reasonable amount in respect of that allowance, and that duty was an administrative duty of a quasi-judicial nature and so not final.

Rather, a dissatisfied taxpayer had a right to appeal. [ 108 ] At the Supreme Court, the dissenting judges clearly viewed the matter as an appeal of an assessment notwithstanding that the basis of the appeal was a complaint about the Minister’s exercise of discretion: "

Section 60 of the Act entitles a taxpayer, after receipt of the decision of the Minister upon appeal from an assessment, if dissatisfied therewith, to appeal to the Court. The decision is appealable, but the exercise of the discretion will not be interfered with unless it was manifestly against sound and fundamental principles.

" [65] " " [Emphasis added.] [ 109 ] The decision of the Minister referred to in this passage is the decision to affirm or amend the assessment following the taxpayer’s objection to the amount assessed. [66] In their dissent, Davis J. and Chief Justice Duff said they would have allowed the appeal and referred the matter back to the Minister: " The Income War Tax Act gives a right of appeal from the Minister’s decisions [on the appeal of the assessment to the Minister] " " and while there is no statutory limitation upon the appellate jurisdiction, normally the Court would not interfere with the exercise of a discretion by the Minister except on grounds of law.

But here, the Commissioner acting for the Minister, did exercise a discretion upon what I consider to be wrong principles of law and it is the duty of the Court in such circumstances to remit the case, as provided by sec. 65 (2) of the Act [the IWTA], for a reconsideration of the subject-matter, stripped of the application of these wrong principles. " [67] [Emphasis added.] [ 110 ] In other words, the challenge to the Minister’s exercise of his discretion was encompassed in the right to appeal an assessment provided in the IWTA : " In my view that is not a legitimate exercise of the discretion . . . .

I have not the slightest doubt that the Commissioner was as anxious to do justice as I am, but the public have been given the right to appeal to the court from the decision of the Minister . . . . " [68] [Emphasis added.] and Here the Minister was to say what was “a reasonable amount” to be allowed for depreciation and he says, in effect – nothing.

The statute expressly gives the taxpayer a right of appeal from the Minister’s decision. [69] [Emphasis added.] [ 111 ] The Privy Council agreed with the dissenting opinion and referred the matter back to the Minister, as the Chief Justice and Davis J. would have: Their Lordships agree with the Chief Justice and Davis J. that the reason given for the exercise of the Minister’s decision was not a proper ground for the exercise of the Minister’s discretion , and that he was not entitled, in the absence of fraud or improper conduct, to disregard the separate legal existence of the appellant company and to enquire as to who its shareholders were and its relation to its predecessors. . . .

Their Lordships agree with the reasons given by these learned Judges [Chief Justice and Davis J.], and their application of the authorities cited by them, and it is unnecessary to repeat them. It follows that the assessment should be set aside, and the matter should be referred back to the respondent. . . . [70] [Emphasis added.] [ 112 ] The IWTA required the Minister to determine in his discretion such reasonable amount as he might allow as depreciation. In Pioneer Laundry , the Minister exercised that discretion improperly and thus the matter was referred back to the Minister for reconsideration.

This review of the exercise of ministerial discretion was undertaken under the authority of the IWTA (i.e., the right to determine an appeal on assessment). The Exchequer Court’s jurisdiction under the EC Act was not relevant. [ 113 ] The King v. Noxzema Chemical Company of Canada, Ltd. [71] dealt with a claim by the government for payment of excise and sales taxes under the Special War Revenue Act . [72]

Section 98 of the SWRA provided that where goods were sold at a price that " “in the judgment of the Minister is less than the fair price on which sales tax should be imposed” " , the Minister had the power to determine the fair price and tax would be payable accordingly. The government commenced an action in the Exchequer Court against Noxzema Chemical Company of Canada, Limited for payment of taxes the government claimed were due based on fair prices as determined by the Minister. Noxzema Chemical Company of Canada, Limited’s defence was that it had paid all taxes for which it was liable based on what

it asserted were fair prices. [ 114 ] Unlike the IWTA , the SWRA did not provide for an appeal. [73] Nonetheless, the Exchequer Court interpreted the Minister’s powers to set prices under the SWRA as being limited. The Supreme Court disagreed, characterizing the Minister’s function in setting prices under the SWRA as a purely administrative one and expressing the view that Pioneer Laundry was inapplicable.

In this regard, Kerwin J. for the majority said: " While in the Income War Tax Act there under review there was no appeal provided in terms from a decision of the Minister as to depreciation, there was an appeal from the determination as to the amount of taxes to be paid, and the proceedings which culminated in the decision of the Privy Council originated with an appeal taken from such determination.

It was held that in arriving at the amount of the income taxes to be paid by the Pioneer Laundry & Dry Cleaners, Ltd., the Minister had actually not exercised the discretion left to him by the Act as to depreciation, and the matter was referred back to him in order that that should be done . In the present case, the Minister has considered and determined the two matters mentioned in

section 98 of the Special War Revenue Act .

" [74] [Emphasis added.] [ 115 ] In Noxzema , because the SWRA did not provide for an appeal, any jurisdiction to review the Minister’s exercise of discretion presumably had to be derived from the EC Act . [75] Nevertheless, there was no suggestion that the Minister had not acted honestly and impartially or that the taxpayer had not been given every opportunity to be heard: . . . it is quite clear that the Minister acted honestly and impartially and that he gave the respondent [Noxzema] every opportunity of being heard, and, in fact, heard all it desired to place before him. [76] [ 116 ] Thus, the two cases may stand together.

The SWRA did not provide a right of appeal, whereas the IWTA did. As to the Exchequer Court’s jurisdiction to provide relief against the Minister concerning the performance of his duty to set fair prices, in Noxzema the Minister properly exercised the discretion he had a duty to exercise. Had he not, perhaps that could be considered by the Exchequer Court under its jurisdiction to review anything done or omitted to be done by the Minister in the performance of his duty, but that was not addressed in either case.

In Pioneer Laundry , the right to appeal the amount of taxes to be paid (i.e., the assessment) provided for in the IWTA permitted the Exchequer Court to examine the manner in which the discretion leading to that assessment was exercised.

The jurisdiction under the EC Act was neither necessary nor engaged. [ 117 ] It might be argued that Pioneer Laundry concluded that the Minister erred in not allowing any depreciation, when the IWTA mandated a reasonable amount of depreciation and, while that type of error in exercising a decision goes to the correctness of the assessment, that is an error of a different nature than the discretion under subsection 247(10).

Said differently, in Pioneer Laundry , the Minister’s error was in interpreting the statute: in concluding that no depreciation could be a reasonable amount of depreciation when the statute mandated a reasonable amount. [77] [ 118 ] The manner in which the Supreme Court in Noxzema distinguished Pioneer Laundry might be viewed as supporting that narrower

interpretation. However, subsequent cases support an

interpretation consistent with the Appellant’s position in this case: that any error of law made in exercising a discretion which must be exercised before an assessment of taxes payable is made (the error may include, but is not limited to, improperly interpreting the statutory language that bestows the discretionary power) is a matter that falls within the appellate jurisdiction of the Tax Court. [ 119 ] Consistent with that view, in D.R. Fraser and Co. v.

Minister of National Revenue [78] the Privy Council described its decision in Pioneer Laundry as follows: that the appellants were entitled to such deduction for depreciation as the Minister might allow and " “that the Minister had not properly exercised his discretion inasmuch as he had had regard to inadmissible considerations” " . [79] [ 120 ] Minister of National Revenue v. Wrights’ Canadian Ropes Ltd. [80] considered an appeal of an assessment under which the Minister disallowed commissions Wrights’ Canadian Ropes Ltd. paid to another corporation.

Under the IWTA, the Minister could disallow any salary, bonus, commission or director’s fee " which in the Minister’s opinion is “in excess of what is reasonable . . . for the business carried on by the taxpayer”. " The Exchequer Court dismissed the taxpayer’s appeal and the taxpayer appealed to the Supreme Court of Canada. The Supreme Court of Canada allowed the appeal and referred the matter back to the Minister.

The Privy Council dismissed the Minister’s appeal of that decision. [ 121 ] Lord Greene, who gave the unanimous decision, stated: The word “discretion” is in truth scarcely appropriate in the context since what the Minister is required to do before he can make a disallowance [of the commissions] is to “determine” that an expense is in excess of “what is reasonable or normal for the business carried on by the taxpayer”. The reference to “discretion” in this context does not in the opinion of their Lordships mean more than that the Minister is the judge of what is reasonable or normal.

If the matter had stood there and there had been no right of appeal against the decision of the Minister the position would have been different from what it is. But in contrast to cases . . . where the decision of the Minister is to be “final and conclusive” a right of appeal to the Exchequer Court is given and the appeal is to be regarded as an action in that Court. This right of appeal must, in their Lordships’ opinion, have been intended by the Legislature to be an effective right.

This involves the consequence that the Court is entitled to examine the determination of the Minister and is not necessarily to be bound to accept his decision. [81] [Emphasis added.] [ 122 ] It is clear from this passage that the Privy Council considered that it was the taxpayer’s right of appeal under the IWTA (i.e., the right to appeal an assessment) that permitted the Exchequer Court to examine the Minister’s determination of the reasonableness of the commission.

However, it is equally clear that the right of appeal did not permit the Exchequer Court to overrule the Minister only because it would have come to a different conclusion. " Nevertheless the limits within which the Court is entitled to interfere are in their Lordships’ opinion strictly circumscribed. It is for the

taxpayer to show that there is a ground for interference and if he fails to do so the decision of the Minister must stand. Moreover, unless it be shown that the Minister has acted in contravention of some principle of law the Court, in their Lordships’ opinion, cannot interfere : the

section makes the Minister the sole judge of the fact of reasonableness or normalcy and the Court is not at liberty to substitute its own opinion for his. But the power given to the Minister is not an arbitrary one to be exercised according to his fancy . " [82] [Emphasis added.] [ 123 ] Putting Wrights’ Ropes in the context of Dow Chemical’s appeal, the Minister is the person responsible for forming an opinion under subsection 247(10) as to whether a downward transfer pricing adjustment is appropriate in the circumstances. The Minister is the sole judge.

But, if the Minister does not form that opinion and come to her decision in accordance with proper legal principles, the Tax Court may interfere on an appeal of the assessment resulting from the Minister’s decision. [ 124 ] In Wrights’ Ropes , the Privy Council referred to its own decision in Pioneer Laundry and said that the ground of attack there had been different explaining that in Pioneer Laundry , the Minister gave a reason for his decision which was not supportable in law, whereas in Wrights’ Ropes the Minister had given no reasons for his decision.

The Privy Council agreed that the IWTA did not require the Minister to provide reasons for his decision to disallow the expense. But that, in the Privy Council’s view, did not disentitle the taxpayer to its appeal. " But this does not necessarily mean that the Minister by keeping silence can defeat the taxpayer’s appeal. To hold otherwise would mean that the Minister could in every case or at least the great majority of cases render the right of appeal given by the statute completely nugatory.

The Court is " " , in their Lordships’ opinion, always entitled to examine the facts which are shown by evidence to have been before the Minister when he made his determination. If those facts are in the opinion of the Court insufficient in law to support it the determination cannot stand . In such a case the determination can only have been an arbitrary one. If, on the other hand, there is in the facts shown to have been before the Minister sufficient material to support his determination the Court is not at liberty to overrule it merely because it would itself on those facts have come to a different conclusion.

As has already been said, the Minister is by the subsection made the sole judge of the fact of reasonableness and normalcy but as in the case of any other judge of fact there must be material sufficient in law to support his decision . " [83] [Emphasis added.] [ 125 ] That is to say, the Exchequer Court’s role was not to determine what is reasonable – the legislators gave that power to the Minister.

But, the Exchequer Court’s role on an appeal of an assessment was to ensure that the Minister’s determination was well-founded in law and supported by the facts. [ 126 ] In the context of Dow Chemical’s appeal, under subsection 247(10), before the Minister can assess a taxpayer who has established a downward transfer pricing adjustment, she is required to determine whether, in her opinion, it would be appropriate to make that adjustment in the circumstances. The Minister’s opinion is not stated to be final and conclusive. The ITA provides Dow Chemical with a right to appeal the assessment.

That right must be intended to be an effective right. Accordingly, under its appellate jurisdiction, the Tax Court is entitled to examine the Minister’s opinion (and resulting decision) on the appropriateness of making a downward transfer pricing adjustment in the circumstances and to consider whether it was well-founded in fact and law. If it was not, then how can it be said that the assessment based on that opinion is correct? [ 127 ] Nicholson Ltd. v . Minister of Natioanl Revenue [84] also dealt with the disallowance of an expense under subsection 6(2) of the IWTA.

The Exchequer Court itself described the case as an appeal that: raises squarely for the first time in Canada the question whether the Court under its appellate jurisdiction may review the actual exercise of discretionary powers vested by the Act in the Minister where such exercise may affect the assessment under appeal and substitute its own opinion for the Minister’s discretion. [ 128 ] After examining the scheme for appeal provided by the IWTA , the subject matter of the appeal, and the Exchequer Court’s jurisdiction, Thorson J. concluded that: (

i) the IWTA provided the taxpayer with a right of appeal; (ii) the appeal was from the assessment; (iii) a taxpayer could appeal the assessment on grounds of fact as well as law; and (iv) the Exchequer Court’s jurisdiction was to consider the correctness of the assessment under appeal. [ 129 ] While the taxpayer argued that the Exchequer Court’s appellate jurisdiction gave it the power and duty to exercise the discretion given to the Minister, this proposition was rejected by Thorson J.

Although he acknowledged the Exchequer Court’s broad appellate jurisdiction under the IWTA , in his view a: " . . . distinction must be drawn between the Minister’s determination and the assessment; they are not the same; the determination must be made before the assessment can be levied. The facts before the Minister do not enter into the assessment; it is the Minister’s determination that does so. The determination itself is, therefore, a fact connected with the assessment. The facts before the Minister are connected with his determination but not with the assessment.

The issues before the Minister on his determination and the Court on the appeal to it are not the same. I can find no support anywhere for the view that the Court may try de novo matters left by Parliament for determination by the Minister in his discretion. What is before the Court is an appeal from the assessment, not an appeal from the Minister’s determination. The sole issue before the Court in an appeal under the Income War Tax Act is whether the “assessment under appeal” is correct in fact and in law. If it is, the appeal must be dismissed; if not, it must be allowed.

" [85] [ 130 ] Although by itself this passage might be viewed as suggesting that the Exchequer Court had no role under its appellate jurisdiction, read in the context of the entire judgment that was not the point being made.

Rather, Thorson J.’s position was that the appellate jurisdiction had limits: although it allowed the Exchequer Court to examine the Minister’s discretionary decision underlying the assessment to determine whether it was supportable, it did not allow the Exchequer Court to put itself in the Minister’s shoes and substitute its decision for that of the Minister. [ 131 ] However, he was clear that the result of the Minister’s exercise of the discretion (i.e., the Minister’s determination) is a fact

connected with the assessment. Therefore, the Minister’s determination is a fact that the Exchequer Court could examine on an appeal of an assessment – because a taxpayer may appeal an assessment on the grounds of fact as well as law. [ 132 ] The ITA contains many provisions that require the Minister to make a determination before an assessment can be issued, although most of them would not be described as discretionary.

For example, before issuing an assessment, the Minister must determine whether interest payable is in excess of a reasonable amount (per paragraph 20(1)(c)); the tax consequences to a taxpayer following the application of the GAAR (per subsection 245(2)); whether unrelated persons deal with each other at arm’s length as a matter of fact (per paragraph 251(1)(c)); or whether bona fide arrangements were made for repayment of a shareholder loan (per subsection 15(2.4)). Each of these determinations, like the determination unde

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