BURLINGTON RESOURCES FINANCE COMPANY, Appellant, v. HER MAJESTY THE QUEEN,, 2017 TCC 144

Docket: 2012-2683(IT)G BETWEEN: BURLINGTON RESOURCES FINANCE COMPANY, Appellant, and HER MAJESTY THE QUEEN, Respondent . Motion heard on June 27, 28, 29 and 30, 2016 at Toronto, Ontario. Before: The Honourable Justice Johanne D’Auray Appearances: Counsel for the Appellant: Alexander Cobb Andrew Boyd Counsel for the Respondent: Erin Strashin Naomi Goldstein Donna Dorosh ORDER UPON Motion by the Respondent for the following relief: 1. an Order directing the Appellant’s nominee to re-attend at the Appellant’s own expense and answer the questions set out in the Amended

Schedule “A” and any proper questions arising from the answers, from the examination for discovery held on July 16-18, July 23, July 29 and December 15-17, 2014, which the Appellant has refused to answer or has not fully answered; 2. in the alternative, an Order requiring the Appellant to fully respond in writing to, and produce all the documents requested in, all of the questions set out in the Amended

Schedule “A” within 90 days of the Order of this Court to this motion; 3. in the alternative, and failing compliance with the Court’s Order, an Order dismissing the appeal; 4. costs of this motion; and 5. such further and other relief as this Court may deem just. AND UPON hearing the submissions of the parties; IT IS ORDERED THAT: The motion is allowed in part, the Appellant will have to answer the questions in accordance with the attached Reasons for Order. A conference call will be held to determine how to proceed, to establish time limits and to discuss the costs for the Motion.

Signed at Ottawa, Canada, this 3 rd day of August 2017. “Johanne D’Auray” D’Auray J. Citation: 2017 TCC 144 Date: 20170803 Docket: 2012-2683(IT)G

BETWEEN: BURLINGTON RESOURCES FINANCE COMPANY, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR ORDER D’Auray J. I.

Introduction [ 1 ] The Respondent has brought a motion pursuant to rules 4, 7, 95 and 110 of the Tax Court of Canada Rules (General Procedure) [1] (“the Rules ”) for an Order: 1. directing the nominee of the Appellant, Burlington Resources Finance Company (“Burlington”), to re-attend at Burlington’s own expense and answer certain questions (the “Disputed Questions”), and any proper questions arising from the answers; 2. in the alternative, directing Burlington to fully respond in writing to, and produce all documents requested in, the Disputed Questions; and 3. directing that this appeal be dismissed if Burlington does not comply with the Order of this Court to this Motion. [ 2 ] The Respondent argues that the Disputed Questions are relevant to the matters in issue and that Burlington has either improperly refused to answer, or not fully answered, the questions. [ 3 ] Burlington opposes this motion and argues that all proper questions have been fully answered and that the Respondent’s improper questions have been correctly refused. [ 4 ] Both parties ask for costs payable to them in any event of the cause, and for the opportunity to make submissions with respect to the amount.

II. Facts [ 5 ] The background to the underlying tax appeal is as follows: [2] 1. Burlington was incorporated in February 2000 as a Nova Scotia unlimited liability company (“NSULC”) and is wholly- owned subsidiary of Burlington Resources Inc. (“BRI”), a resident U.S. corporation. 2. Burlington’s business involved obtaining financing to fund the operations of affiliated Canadian companies. Specifically, Burlington was involved in borrowing funds from public markets and “on-loaning” those funds to its affiliated Canadian entities, which were conducting businesses related to crude oil and natural gas assets. 3.

BRI unconditionally guaranteed the payment of the Notes and Burlington “on-loaned” the proceeds to its Canadian sister companies. 4. Prior to the issuance of the Notes, BRI ensured that Burlington would be able to make all the payments due under the bonds, by putting in place a series of transactions, which included intercompany promissory notes, forward purchase agreements, letters of direction, capital contribution agreements, contribution agreements, and swap agreements (collectively referred as the “Hybrid Instruments”). 5.

Involved in these Hybrid Instruments were: Burlington Resources Canada LTD. (“BRCL”); Burlington Resources Canada Inc. (“BRCI”), which was predecessor to BRCL Burlington Resources Canada (Hunter) Ltd. (“BRCH”); Canadian Hunter Exploration Ltd.(“CHEL”), which was a predecessor to BRCH; and Burlington Resources Canada Corporation (“BRCC”), which was a predecessor to BRCH. 6. In 2001 and 2002, Burlington borrowed approximately US $3 billion by issuing the below seven bonds (the “Notes”) to

arm’s-length parties: Issuance Date Principal Interest Maturity February 12, 2001 US $400 million 6.68% February 15, 2011 August 24, 2001 US $178 million 6.40% August 15, 2011 August 24, 2001 US $575 million 7.20% August 15, 2031 November 16, 2001 US $500 million 5.60% December 1, 2006 November 16, 2001 US $500 million 6.50% December 1, 2011 November 16, 2001 US $500 million 7.40% December 1, 2031 February 25, 2002 US $350 million 5.70% March 1, 2007 7.

Burlington and BRI agreed that Burlington would pay guarantee fees to BRI based on an annual guarantee fee of 50 basis points (or 0.5 percent) of the principal amount of the Notes. According to Burlington, the fees were incurred in exchange for BRI’s guarantees and were based upon advice received from investment banks. 8. During its 2002 to 2005 taxation years, Burlington paid approximately $83 million in guarantee fees to BRI. 9. The total tax in dispute for the years under appeal is $21,179,800, but this is a minimum since the liability issues continue until the last bond matures in 2031. 10.

BRI and its subsidiaries, including Burlington, were acquired by ConocoPhillips in 2006. 11. Burlington deducted the guarantee fees in computing its income for the 2002 to 2005 taxation years pursuant to

section 9 of the Income Tax Act [3] (the “ Act ”). 12. The Minister of National Revenue (the “Minister”) reassessed Burlington in respect of those taxation years, disallowing the deductions of the guarantee fees. 13. The Minister did so by relying on paragraphs 247(2) (

a) and (

c) of the Act to reduce the amount of the guarantee fees to nil in each taxation year, claiming that the terms and conditions of this fee arrangement between Burlington and its parent company were not terms and conditions which would have existed between arm’s-length parties. 14. The Minister also relied on subsection 247(3) of the Act to impose transfer pricing penalties, alleging that Burlington failed to make reasonable efforts to determine the arm’s-length transfer price in respect of the guarantees. 15. The basis of the Minister’s assessment is based on the following theories: i.

Yield Approach: if the yield approach is applicable, there was no economic incentive for Burlington to enter into the transactions in respect of the guarantee fees, because the implicit support of BRI would have equalized the credit rating of Burlington and BRI. ii. Price of the guarantee fees: the terms or conditions made or imposed in respect of the guarantees differed from those that would have been made between persons dealing at arm’s-length such that the amount of the guarantee fees payable would have been nil had Burlington and BRI been dealing at arm’s-length. iii.

Duplication Factor: Burlington’s status as an unlimited liability company formed under the laws of Nova Scotia was duplicative of the guarantees from Burlington’s perspective. 16. In her Amended Reply to Notice of Appeal, the Respondent also relied on paragraphs 18(1) (

a) and 20(1) (e.1) of the Act . The paragraph 18(1)(

a) argument falls under the duplicative theory, namely that the guarantee fees were not paid to ensure that the outside investors would get their money back, in light of the fact that Burlington was a NSULC and due to the hybrid financing arrangements. Therefore, the guarantee fees were not incurred for the purposes of earning income from a business but for the purpose of obtaining a tax benefit. 17.

With respect to paragraph 20(1) (e.1) of the Act , the Respondent’s theory is that the guarantee fees were not incurred for the purposes of borrowing money because BRI provided the guarantee to Burlington before it had to pay a guarantee fee and before it actually paid a guarantee fee. Therefore, the guarantee fees were not made for the purpose of borrowing money to be used by Burlington for the purpose of earning income from a business but to obtain a tax benefit. 18. In her Amended Reply, the Respondent also relied on paragraphs 247(2) (

b) and (

d) to deny the deduction of the guarantee fees; however, the Respondent has informed the Court that she is abandoning the argument that the guarantees were not entered into for bona fide purposes other than to obtain a tax benefit for Burlington pursuant to paragraphs 247(2)(

b) and (

d) of the Act . III. Analysis - Principles of Discovery [ 6 ] The purpose of, and principles governing, examinations for discovery are well established in the jurisprudence. It is not surprising therefore that the parties generally referred to the same principles in support of their respective positions. Where they did disagree was on the weight I should give to certain of the principles and on the role played by the principle of proportionality. [ 7 ] There was no disagreement on the purpose of discovery. Discovery is intended to enable the parties to know the case they

have to meet at trial, to know the facts upon which the opposing party relies, to narrow or eliminate issues, to obtain admissions and to avoid surprises at trial. The scope of discovery is determined primarily by reference to the pleadings which set out the matters in issue between the parties. [ 8 ] A party, and in the case of a corporation its nominee, is required by subsection 95(1) of the Rules to answer any proper question relevant to any matter in issue. [ 9 ] In support of its position, the Respondent asked that I give particular weight to the following discovery principles: [4] 1.

Relevancy is extremely broad and should be liberally construed. The threshold for relevancy on discovery is very low but does not allow for fishing expeditions, abusive questions, delaying tactics or completely irrelevant questions. [5] 2. Everything is relevant that may directly or indirectly aid the party conducting the discovery to maintain its case or damage that of its adversary. If the questions are broadly related to the issues raised, they should be answered. [6] 3.

The examining party is entitled to any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party. [7] 4. Proportionality is not something to be used as a shield. Given that there are significant issues and a significant amount of tax at stake, proportionality should not be the primary focus in determining whether the Disputed Questions should be answered. Instead, relevancy should be the key driver. [8] 5.

A motions judge should not second guess the discretion of counsel by examining minutely each question or by asking counsel to justify each question or explain its relevancy. [9] 6. A motions judge should not seek to impose his or her views of relevancy on the judge who hears the case by excluding questions that he or she may consider irrelevant but which, in the context of the evidence as a whole, the trial judge might consider relevant. [10] 7. The discovery process is the most significant stage of the litigation in allowing a party to prepare for trial.

It allows the parties to prepare their respective case and prepare full answers to their opponent’s case. Full and open discovery gives parties the complete picture. [11] 8. Discovery fails when the parties engage in obfuscation. The purpose is no longer disclosure but how to avoid disclosure. When that occurs, discovery’s purposes are no longer being served, and neither is the administration of justice.

Every effort should therefore be made to allow for full and proper disclosure, and courts must be guided by the well-established discovery principles and the low threshold for relevancy described in Baxter v The Queen , 2004 TCC 636 . [12] [ 10 ] In response, Burlington asked that I give weight to the following principles: [13] 1. The obligations of a party being discovered are not without limit. [14] 2. A party has no right to go beyond the case as pleaded to interrogate concerning a case it has not attempted to make in its pleadings.

A party asking the questions must establish that they are relevant to issues raised in the pleadings. [15] 3. Discoveries should never become general fishing expeditions, that is, an indiscriminate request for production, in the hope of uncovering helpful information. [16] 4. Even where proportionality is not specifically codified, applying rules of court that involve discretion includes an underlying principle of proportionality which means taking account of the appropriateness of the procedure, its cost and impact on the litigation, and its timeliness, given the nature and complexity of the litigation. [17] 5.

The role of an examination for discovery is to circumscribe the scope of the dispute to some degree, not to broaden it. A court may terminate an examination for discovery where it is clear that it has become excessive and unjustified. [18] 6. Where there are questions that are not relevant, that amount to a fishing expedition, or that are not proportional, or where the discovery process is being abused, the courts will not require that a party undertake the effort of responding.

In determining whether to order a party to respond, this Court has indicated the ultimate purpose is to fairly, reasonably and expeditiously move matters along to a hearing. [19] IV.

Proportionality [ 11 ] As already mentioned, the parties differed when it came to the role played by the principle of proportionality in discovery. [ 12 ] Burlington argued that, while courts once took a “broad and liberal” approach to the concept of relevance in discovery, relevance must now be tempered by proportionality. [20] [ 13 ] Burlington submitted that other courts have declared that “the “broad and liberal” principle has outlived its useful life and “should be abandoned in place of proportionality rules.” [21] Burlington suggested that this Court ought to do the same. [ 14 ] In support of this argument, Burlington referred to the recent decisions of the Supreme Court of Canada in Hryniak v Mauldin and Association des parents de l’école Rose-des-vents v British Columbia (Education) .

According to Burlington, these decisions mean that the principle of proportionality should govern the application of our rules of court, including the discovery process. [22]

[ 15 ] The Respondent on the other hand, submitted that in this case, due to the complexity of the issues and the amount of tax at stake in this case, proportionality does not trump relevancy. [ 16 ] While I agree that that proportionality needs to be taken into account, I do not agree with Burlington that it now trumps relevancy in all situations and that the “broad and liberal approach” to determining relevancy must now be ignored. In my view, both principles continue to exist and each situation needs to be examined on its own merits.

In some situations, proportionality will trump relevancy and in others, relevancy will remain the key driver in determining whether a question needs to be answered. [ 17 ] The starting point in an examination of the role of proportionality is subsection 4(1) of the Rules. It contemplates a role for proportionality in the application of the Rules: “[t]hese rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.” [ 18 ] The jurisprudence of this Court has also recognized the importance of proportionality.

In Cameco Corp. v Canada , [23] Chief Justice Rip (as he then was) considered proportionality in the context of discovery in a transfer pricing case. However, he ultimately ordered Cameco to produce more relevant documents even though it had already produced 59,000 hard copy documents and 96,000 electronic documents. Chief Justice Rip reasoned at paragraph 44: 44 The facts in this appeal are complex. The Affidavit of Peter Macdonald describes the document collection process and it is apparent that the Appellant has dedicated significant resources including employing expertise, time and costs.

Yet, given the complexity of this case and the amount at stake, it is not unreasonable for the Appellant to review and conduct additional searches and make further inquiries into certain documents. [ 19 ] Similarly, in his recent decision in CIBC , [24] also involving a motion to compel answers, Chief Justice Rossiter recognized the importance of proportionality in the appropriate case. However, he concluded that proportionality does not always trump relevancy.

At para. 276, the Chief Justice stated: 276 As for any issue of proportionality, the principle is certainly a worthy and important one, and efforts should certainly be made to keep costs down. But proportionality is not something to be used as a shield. In considering these appeals, and particularly the issues at stake and the quantum, proportionality is not the primary focus of decisions on discovery for these appeals. Relevancy is the key driver. [ 20 ] The above two decisions are in my view consistent with the ruling in Hryniak .

They both took proportionality into account and weighed it against the complexity of the issues at stake and the amount of tax at issue. [ 21 ] Contrary to Burlington’s submission, Hryniak and Rose-des-vents do not call for proportionality to be the key driver in all situations.

Indeed, while Justice Karakatsanis in Hryniak called on courts to actively manage the legal process in line with the principle of proportionality, she also emphasized the importance of taking into account the nature and complexity of the litigation: 31 Even where proportionality is not specifically codified, applying rules of court that involve discretion “includes ... an underlying principle of proportionality which means taking account of the appropriateness of the procedure, its cost and impact on the litigation, and its timeliness, given the nature and complexity of the litigation” ( Szeto v.

Dwyer , 2010 NLCA 36 , 297 Nfld. & P.E.I.R. 311, at para. 53 ). [ 22 ] In examining the Disputed Questions I therefore must take into account that “relevance” must be weighed against matters such as, the degree of relevance, how onerous it is to provide an answer, and whether the answer requires fact or opinion of law. [25] [ 23 ] It is also clear that in considering proportionality, I will have to take into account that we are here dealing with a complex transfer pricing dispute involving a large amount of disputed tax. The total tax in issue is $21,179,800 at a minimum.

As some of the Notes will be outstanding until the year 2031, the potential total tax recoverable by the Minister in relation to this tax appeal is much higher than this amount. In addition, I will be dealing with Conoco Funding Company involving the same issue as Burlington in a separate Order. ConocoPhillips purchased Burlington in 2006. Conoco Funding Company’s appeal also raises the issue of the deductibility of guarantee fees paid its parent corporation ConocoPhillips. [ 24 ] Before leaving proportionality, I should mention that I carefully examined Burlington’s evidence on proportionality.

This evidence did not convince me that proportionality should trump relevance in all situations. [ 25 ] Burlington’s evidence on this issue comes from Ms. Lily Hoang (“Ms. Hoang”) who is employed by ConocoPhillips Company [26] as Senior Tax Counsel. Ms. Hoang provided an affidavit dated December 28, 2015 explaining how time-consuming, impractical and burdensome it would be for Burlington to carry out the necessary inquiries and searches to locate the information to respond to the Disputed Questions. [ 26 ] Ms.

Hoang explains that most documents that may be responsive to the Disputed Questions, and particularly those documents that relate to the guarantees and the guarantee fees, would have been stored in three cities, across a number of separate corporate departments: Houston - Treasury, Legal and Tax Planning; Bartlesville – Accounting; Calgary - Accounting, Tax Planning and Legal. [27] Ms.

Hoang states that each of these departments maintains its own records and creates its own indexes as a means to locate files within its stored records. [ 27 ] I understand that the indexes are, essentially, a list of the files in that department’s storage facility. [28] Each file item listed on an index corresponds to certain boxes of documents.

If a file listed on an index is perceived to be relevant to a Disputed Question, then its corresponding boxes of documents must be pulled from the shelves and their contents reviewed to determine if the sought information is contained therein and is indeed responsive to a Disputed Question. [29] [ 28 ] In terms of the number of boxes involved, Ms. Hoang notes that the treasury department has roughly 3,000 boxes in storage, as do the other departments. [30] Ms. Hoang emphasizes that while the indexes maintained by each of the departments are extensive, there is no guarantee that they are accurate or complete. [31]

[ 29 ] Ms. Hoang states that she has not been able to identify a single comprehensive index that would allow an individual to efficiently search all of the records by subject for any responsive documents. [32] In oral submissions, NSULC for Burlington summed the situation up: “The point is that, even though indexes exist, those indexes are not sufficient to allow Ms. Hoang or anyone else to quickly identify even the boxes where relevant documents or responsive documents might be found.” [33] [ 30 ] In her affidavit, Ms.

Hoang does not state how much time these searches would take or how expensive it would be to respond to the Disputed Questions. However, counsel for Burlington at the hearing stated that: “if the Respondents got everything they wanted, it would take months if not years to produce [this] colossal amount of information.” [34] [ 31 ] Beyond the existence of the indexes and uncertainty around the time and cost required to conduct these searches, Ms.

Hoang stresses three central difficulties inherent in responding to the Disputed Questions. [ 32 ] The first difficulty is that there are no current employees within the ConocoPhillips Group with direct knowledge of the transactions in issue, or with knowledge of where or how the documents that may be responsive to the Disputed Questions might be located or organized. [ 33 ] The second difficulty is that Ms.

Hoang has been informed that there is no efficient or even reliable way to search all the records of the ConocoPhillips Group to identify documents that could be used to respond to the Respondent’s questions and requests as the documents are maintained in different mediums, in multiple locations, and indexed in different ways. [ 34 ] The third difficulty is that, even if such a massive and unguided review were undertaken, it would not likely produce a material number of documents that are responsive to the Disputed Questions as many of the documents were likely destroyed according to their document retention policies.

In other words, it is not just that these searches are inordinately time-consuming, it’s that they are time consuming and likely to be futile. [ 35 ] There are a number of shortcomings in Ms. Hoang’s evidence. First, she does not indicate how many documents would need to be searched, how long it would take to conduct these searches (although we do have counsel’s statement), how many personnel would be required, or how much it would cost. [ 36 ] Second, Ms. Hoang did not contact former employees of BRI who were involved in the transactions at issue.

This notwithstanding the fact that she lists the former employees in her affidavit. I agree with the Respondent that Ms. Hoang could have at least attempted to reach out to these key former employees to obtain a better appreciation of the task of responding to the Disputed Questions. [ 37 ] Third, I agree with the Respondent that Ms. Hoang has overstated the difficulty of responding to the Disputed Questions given the existence of these indexes.

As the Respondent, pointed out, the indexes would be a useful tool to reduce the burden of responding and make it something less than the “massive and unguided review” [35] that Ms. Hoang alleges. [ 38 ] Ms. Hoang estimated that there are approximately 12,000 boxes of documents stored between the relevant departments, housed in a few different locations. The indexes allow Ms.

Hoang to, as she describes in her own words, “get a general understanding of whether there might be relevant documents” in the stored boxes. [36] [ 39 ] While a “quick identification” of documents may not be possible, I agree with the Respondent that, with the help of the indexes, a careful and systematic identification of boxes with responsive documents is surely achievable. [ 40 ] Fourth, counsel for Burlington submitted that responding to the Disputed Questions would necessitate going through the index referencing and box pulling “exercise described by Ms.

Hoang again and again and again.” [37] Though I acknowledge that this is somewhat dependent on the breadth of the questions asked, I have a difficult time appreciating how boxes previously reviewed could not somehow be accounted for in a way that this exercise need not to be approached entirely anew with each subsequent Disputed Question. [ 41 ] Importantly, the Respondent cannot be denied access to information and documents that it is legally entitled to solely because Burlington failed to systematically or adequately maintain a system of records thus making the location of information potentially onerous.

If I were to conclude that taxpayers need not produce documents because their records were disorganized and could not be systematically searched, this would create a perverse incentive for taxpayers not to keep organized records of their tax affairs. [ 42 ] The same logic applies to the Burlington’s retention policy. The Respondent should not be penalized because Burlington may have destroyed certain documents in accordance with their retention policy. This is entirely out of the Respondent’s control. [ 43 ] Another shortcoming, in Ms.

Hoang’s evidence is that she could not recall when either the IRS audit started or the CRA audit started. These dates are relevant to the application of the Retention Policy. She admitted that in accordance with the Retention Policy of Burlington and/or ConocoPhillips, they had to keep all documents relating to an audit or an appeal, such as this one. Therefore, unless Burlington can positively affirm that a relevant document no longer exists, it will have to search for the document. [ 44 ] One concern of Ms.

Hoang that I do find valid relates to the completeness and accuracy of the search. [38] Because the indexes purporting to catalogue the contents of the stored documents were created at different times by different groups, she states that there could be no guarantee that a search would be thorough. [ 45 ] This is a legitimate concern and, correspondingly, a qualification of the exhaustive nature of the required search can be built-in. Where Burlington is ordered to answer questions, it will not need to search beyond the indexes.

In other words, a truly unguided rifling through 12,000 boxes would not be required. [ 46 ] In conclusion, I am not persuaded that the costs, time, and effort involved for Burlington to respond to any relevant questions would be disproportionate, given the amount of money involved which according to the Respondent is close to $100 million, the importance of the case and the complexity of the issues. Proportionality must not defeat the purposes of discovery, particularly in an

appeal such as this. Where the issues are complex and fact based and where the amount at stake is considerable, both parties should be able to fully prepare for trial and know their case. [ 47 ] Therefore, I will address proportionality in the following manner. If I find a question relevant, blanket concerns of proportionality will not override the need to respond and to look for documents relying upon the indexes.

However, if I am convinced that a question is marginally relevant, and there are proportionality concerns, I may order Burlington not to answer the question, I will analyze each situation on its own merits. V. Narrowing of the issues in dispute [ 48 ] The precise scope of the underlying dispute has also emerged as a point of contention in this motion. [ 49 ] Burlington alleges that the scope of the underlying dispute has been substantially narrowed by admissions in the Answer with respect to some assumptions of fact made by the Minister and by comments made by the Respondent’s nominee at discovery.

Accordingly, Burlington argues that many of the questions the Respondent is moving on do not relate to a live dispute between the parties and spending energy in discovery on an admitted fact or conceded issue is improper. [ 50 ] Burlington particularly maintains that the transfer pricing issue is now “off the table” [39] in the appeal. Burlington explains that because the Respondent no longer relies on paragraphs 247(2) (

b) and (

d) of the Act , all that remains of the transfer pricing dispute is the question of the appropriateness of the guarantee fees under paragraphs 247(2)(

a) and (

c) of the Act . [ 51 ] Burlington submitted that in assessing it, the Minister took into account as a presumption of fact that the fee an arm’s-length party would require to guarantee Burlington’s debts would have been so “exorbitant/more than 50 basis points”. Counsel for Burlington argued that since in its Answer to the Amended Reply to Notice of Appeal, Burlington admitted these facts, the Respondent cannot ask questions with respect to them.

There is no longer a controversy about what the arm’s-length transfer price would have been. [ 52 ] The Respondent argued that the presumptions of fact relied by the Minister, namely that its “exorbitant/more than 50 basis points” does refer to Burlington operating as a finance company on a stand-alone basis and, therefore, the admission by Burlington with respect to this fact, does not defeat its arguments under paragraphs 247(2) (

a) and (

c) of the Act . [ 53 ] I agree with the Respondent. It is clear that the Respondent in her Amended Reply to the Notice of Appeal was referring to Burlington operating on a stand-alone basis. Therefore, there is no agreement about the transfer price that an arm’s-length party would charge. This remains a live issue in this appeal. Burlington is attempting to crystallize an inaccurate characterization of the Respondent’s position.

Therefore, the assertion that the dispute has been drastically narrowed cannot be sustained and the Respondent’s discovery rights will not be curtailed to deny her the opportunity discover on an issue that goes to the heart of the dispute. [ 54 ] Burlington also submitted that the Respondent has pleaded that Burlington’s functional deficiency and inability to bear risk on a stand-alone basis made it imperative for any arm’s-length lender to require a guarantee from BRI. [40] Relying on these facts pleaded by the Respondent [41] , Burlington alleges that I should conclude that the admission that the guarantee was necessary for arm’s-length lenders means that the guarantee was necessary for Burlington. [ 55 ] I do not agree with Burlington, the Respondent’s position is that under 247(2) (

a) and (

c) of the Act , with arm’s-length party, in similar circumstances Burlington would have not pay anything for the guarantee since they were no benefit to be had. Therefore, the transfer pricing issue remains a live issue in this appeal. [ 56 ] I turn now to address Burlington’s submissions in relation to the Respondent’s argument under paragraph 18(1) (

a) of the Act . The Respondent’s position is that under paragraph 18(1)(

a) of the Act no deductions should be allowed in respect of the guarantee fees as they were not incurred for the purpose of earning income. [ 57 ] Burlington has asked me to conclude that the Respondent’s paragraph 18(1) (

a) of the Act argument is so untenable that it does not warrant the type of onerous searches for information and documents that the Respondent is seeking. [42] [ 58 ] Principally, Burlington alleges that the Respondent’s theory that the guarantee fees were not incurred for an incoming-earning purpose is untenable in light of the law regarding paragraph 18(1) (

a) of the Act . Burlington cites a number of cases that found that a taxpayer is entitled to deduct an expense for valid services, even if a non-arm’s length party would have been willing to provide it for free. [43] Therefore, Burlington alleges that paragraph 18(1)(

a) of the Act cannot be contorted to deny a deduction on the basis that perhaps BRI would have been willing to provide the guarantee without charging for it. [ 59 ] The case law referred to by Burlington only suggests that it cannot be precluded from deducting the guarantee fees by virtue of the fact that BRI had, at one time, provided a guarantee without charging fees. It does not unquestionably lead to the conclusion that the guarantee fees were incurred for the purposes of earning income. [ 60 ] In any event, since the theory of the Respondent with respect to 18(1)(

a) of the Act is not based on the premises that at one point Burlington did not pay for the guarantee fees, Burlington argument’s do not hold. VI. Recorded refusals [ 61 ] At the examination for discovery, counsel for Burlington refused to answer a number of questions on the ground that the questions were irrelevant. Now before me on some of these questions, Burlington is arguing that it would be too onerous and disproportionate to answer these questions. The Respondent states that a party cannot argue that a question is irrelevant and then later seek to ground its refusal to answer on the basis of proportionality. Proportionality pre-supposes that a question is relevant.

[ 62 ] The Respondent submits that support for this proposition can be found in CIBC where Chief Justice Rossiter rejected CIBC’s request to re-evaluate its reasons for refusals. CIBC had argued that, in the event that its claim for litigation privilege was defeated, it should be permitted to re-evaluate its documents to determine if their production could be refused on the basis of solicitor-client privilege. CIBC promised to then produce any relevant documents that were not covered by solicitor-client privilege.

In denying this request, Chief Justice Rossiter said, essentially, enough is enough. [ 63 ] However, CIBC is distinguishable here. CIBC was asking to re-evaluate its refusals after the hearing of the motion, in the event that it was unsuccessful in asserting litigation privilege due to an improper coding of documents by a third-party. In the event that CIBC’s subsequently asserted claim of solicitor-client privilege was not accepted by the other party, the parties would have had to return before the Chief Justice for further submissions.

In denying this request, the Chief Justice stated at paragraph 185 that “[t]here must be some finality.” [ 64 ] In this appeal, both parties knew that proportionality would be raised during this motion. It was the subject of evidence in the form of the affidavit of Ms.

Hoang which the Respondent cross-examined on and it was addressed by both parties on the hearing of the motion. [ 65 ] Although I agree with the Respondent that proportionality on a refusals motion is usually only considered if a question is first found to be relevant, I do not accept that a party cannot argue that a question is irrelevant and alternatively if the Court would find it relevant, that it would be disproportionate to require the party to answer it. [ 66 ] Proportionality concerns are embedded within the scope of permissible discovery.

When considering whether a party should be ordered to answer a question that they argue is irrelevant, this Court must determine first whether the question is relevant by having reference to the pleadings. Even if the question is relevant, this Court must be alive to the proportionality concerns implicit in the Rules . [44] [ 67 ] Thus, Burlington will not be prevented from arguing proportionality where it originally refused to respond to a question on the basis of relevance. VII.

Allegations of attempts to create an alternative basis of assessment [ 68 ] Another issue raised by Burlington is whether the Respondent’s conduct is tantamount to creating an alternative basis of assessment. [ 69 ] Burlington alleges that the Respondent’s questions on discovery amount to an effort to re-audit the taxpayer with an apparent view to developing an alternative basis of assessment that has not been identified or pleaded. [45] Burlington accuses the Respondent of taking an “Ever-Shifting Position” and points out that the Respondent will still attempt to amend her pleadings after this motion. [46] On this basis, Burlington has asked me to limit or terminate the Respondent’s discovery rights because she has no right to conduct a broad- range questioning aimed at trying to determine a case to plead. [ 70 ] In terms of terminating the Respondent’s discovery rights altogether, Burlington cites the decision of Aventis Pharma Inc. v Canada . [47] In that case, the Federal Court of Appeal upheld the decision of Associate Chief Justice Lamarre of this Court to terminate the Respondent’s examination for discovery where it was obvious that her aim was to discover with a view to developing an alternative basis of assessment that had not been defined in the pleadings. [ 71 ] Counsel for the Respondent strongly rejected Burlington’s submission that she was attempting to misuse the discovery process in an effort to uncover a new basis of assessment. [48] The Respondent admits that she will seek to amend her pleadings after the hearing but explained that the only function of the amendment will be to narrow the issues for trial.

The intended amendment will result in the withdrawal of the transfer price re-characterization argument under paragraphs 247(2) (

b) and (

d) of the Act . [ 72 ] Having read the transcript from the examination for discovery and, in light of the refusals that the Respondent is moving on, it is far from obvious to me that the Respondent has attempted to examine on a case which she has not made in her pleadings. I therefore decline to terminate outright the Respondent’s discovery rights in a manner akin to Aventis Pharma . [ 73 ] This does not mean, however, that I will not intervene to prevent the Respondent from pursuing a particular question or line of questions if I find it to be irrelevant or unsupported by the pleadings. VIII.

Excessive number of questions taken under advisement [ 74 ] A further issue that must be addressed relates to the practice of taking questions “under advisement” during an examination for discovery. [ 75 ] The Respondent argues that refusing to answer questions on the basis that the questions are being taken “under advisement” is a misuse of the examination for discovery process. Burlington’s nominee refused to answer a large number of questions on this basis. [ 76 ] The examination for discovery of the nominee of Burlington lasted nine days.

The Respondent asked 4122 questions, 1700 questions were taken under advisement, and 1200 of these questions were later refused. [ 77 ] The Respondent insists that by taking so many questions under advisement, Counsel for Burlington is ignoring subsection 107(1) of the Rules which requires grounds to be given when objecting to a question. Consequently, counsel for the Respondent was

deprived of the opportunity to reformulate, reframe or narrow her questions in order to meet a proper subsection 107(1) objection. The Respondent pointed to exchange below as an example of where the discovery process was so thwarted: Q. What I am saying is: Did the appellant ever ask for this guarantee. Is there any document or communication or anything that shows or states or contains any request by the appellant to BRI for this guarantee to be executed or any guarantee to be executed? Ms. MacDonald: Could you please explain to me the relevance of whether the appellant asked for it or not? Ms.

Mboutsiadis: This has to do with what arm’s-length parties would do. If an arm’s-length party is someone asking for a guarantee, they would ask for it. We are trying to establish what the guarantee fee is. We are going to look at what other parties would have done. Maybe in another scenario, another party would ask for the guarantee. I think I know what the answer is. These are the tedious questions we talked about. Ms. MacDonald: Under advisement. Ms. Mboutsiadis: Why are you taking that under advisement? You can give me an undertaking to find out. Ms.

MacDonald: I would like to take the question under advisement. Ms. Mboutsiadis: Is there a reason? Ms. MacDonald: I am not sure whether the appellant asked its parent for this guarantee informs the arm’s-length transfer price for the guarantee at issue in this litigation. Ms. Mboutsiadis:It relates to. It doesn’t have to inform anything. All discoveries are about is trying to find out information about facts that relate to everything that is going on, that are part of it. Ms. MacDonald: You have my position. Ms.

Mboutsiadis: I am trying to explain it so maybe you kill [can] change your position and give me an undertaking. Ms. MacDonald: I don’t intend to change my position. Ms. Mboutsiadis: Even if I explain to you why it is relevant? Ms. MacDonald: I would prefer to move on with the questioning of Mr. Delk while he is here. Ms. Mboutsiadis: I would too. I need to establish this first. Are you saying if I can’t [can] explain to you why it is relevant, you are not going to change your mind or even try to think about it? Ms. MacDonald: Please move on with your questions. I have given you my position. Ms.

Mboutsiadis: I am taking that as a notice to me that, even if I explain the relevance, you won’t change your position. Ms. MacDonald: Please ask your next question. [49] [ 78 ] In response to this submission, I offer some general guidance, starting with the recent decision of the Federal Court of MediaTube Corp. v Bell Canada [50] . There the Federal Court criticized the practice of interrupting discovery through the use of quasi- objections.

At para. 20, the Court stated: 20 The Court does not support the over abundance of interruptions in an examination by the use of a quasi objection such as “under advisement”. Witnesses should be permitted to answer proper questions. If the witness does not know the answer then that is the answer and that is when undertakings are appropriate to make further inquiries and provide answers on a follow-up examination or by way of writing if the circumstances are such that answers in writing are acceptable to the party examining.

Parties to litigation are expected to generally follow the Rules keeping in mind that flexibility, civility and proportionality must be exercised in all cases. [ 79 ] I will also note that where the tactic of taking questions under advisement without explanation hinders the examination, there may be cost consequences, as in the case of Glaxo Group Ltd. v Novopharm Ltd . [51] [ 80 ] In my view, the practice of using the quasi-objection “under advisement” needs to stop. It is not a response contemplated by

section 107 of the Rules . According to the Rules , a nominee either answer the question, refuses to answer and explains the basis for such refusal, or takes an undertaking if he or she does not know the answer. The “under advisement” quasi-objection is often a tactic used to gain time to reflect on which basis the question will be refused, without the party having to explain, at the time of discovery, why such question was refused. It deprives the party asking the question or the opportunity to rephrase the question. In my view, taking a question under advisement amounts to a “refusal”. IX.

Third-Party Documents [ 81 ] With respect to the third-party documents requested by the Respondent from BRI and/or BRCC and other members of the BRI’s family, I adopt the comments of Justice Campbell Miller in the HSBC Bank Canada ’s [52] decision where he ordered the Appellant to obtain the documents from its parent. At paragraph 13 of his reasons for Order, he stated as follows: The Appellant raises another factor, relying on a comment from Justice Hugessen in Eli Lilly v. Apotex Inc. cited in the Michelin case,

that it is proper to require third party information only where one may reasonably expect that it will be honoured because of the relationship between the party and third party. The Appellant contends it would not be reasonable to expect a request would be honoured by the Parents with respect to highly sensitive information, such as the requirements of financial regulatory regimes governing the Parents, nor to documents that lack any connection with the Appellant (eg. other guarantees and comfort letters).

Bringing the Parents’ documents under the protection of the Confidentiality Order issued in this case should address the Appellant’s first concern and alleviate any similar concern of the Parents. With respect to the request for documents to which the Appellant is not a party, I see the issue of reasonable expectation less in terms of the lack of connection as I do in terms of whether or not the document is indeed relevant. Given these views, I have no hesitation in concluding that it is reasonable to expect the Parents to respond positively to relevant inquiries.

I see no impediment in exercising my discretion pursuant to Rule 83 to order production of relevant documents. This conclusion addresses all those challenges by the Appellant to the Requests based on documents not being in the Appellant’s possession or control, where such documents may be in the possession, control or power of the Parents. X. Examination of Disputed Questions [ 82 ] I want to be clear that in examining the questions in dispute, I will not repeat my findings on the issues that I have just addressed.

For example, where Burlington’s response to a category of questions is that the transfer pricing is not in issue, in light of the Minister’s assumptions of fact and its admissions, I will not repeat my disagreement with Burlington’s position. Similarly, I will not repeat my position on proportionality, every time that it is raised by Burlington in respect of a Category. [ 83 ] That said, I will now address the Disputed Questions.

The Respondent has grouped the questions into 70 categories, each related to a particular line of questioning. [ 84 ] Categories 1 to 46 contain questions that the Respondent alleges have been improperly refused. Categories 47 to 70 contain questions which the Respondent alleges Burlington has provided answers that are nonresponsive. [ 85 ] At the hearing, counsel for Burlington asked that I rule on a category-by-category basis such that, if any of the questions in a category are held to be improper, none of them have to be answered. [53] I have not adopted this approach with respect to all categories.

In some categories, my ruling on the propriety of the questions varies depending on the individual question. [ 86 ] Certain categories of questions are no longer in dispute and are not discussed in these reasons.

The category numbering is sequential, but some numbers are not dealt with. [ 87 ] As well, during the hearing, counsel advised that the following questions are no longer part of this motion: 168, 175, 177, 206, 226, 227, 748, 828, 892, 1537, 1560, 1601, 1606, 1607, 1618, 1619, 1681, 1685, 2524, 2525, 2526, 2587, 2588, 2589, 2590, 2591, 2601, 2602, 2603, 2604, 3183, 3185, 3187, 3189, 3233, 3236, 3239, 3240, 3241, 3243, 3244, 3245, 3247, 3248, 3250, 3251, 3252, 3253, 3254, 3255, 3256, 3258, 3261, 3262, 3263, 3264, 3265, 3266, 3267, 3268, 3269, 3270, 3271, 3273, 3274, 3276, 3280, and 3281. A.

Improper Refusals Category 1: Questions relating to the preparation of Burlington’s nominee for examination Questions 1929-1933, 1967-1970, 1975-1979, 1983-1987, 1991-1995, 2053-2057, 2061-2065, 2069-2073, 2077-2081, 2096-2100, 2104- 2108, 2112-2116. [ 88 ] This category of questions relates to inquiries made by Mr. Delk to inform himself in preparation for the second part of the examination for discovery in December 2014. In particular, the Respondent asked Mr. Delk what information and documents were provided to him by certain named employees at ConocoPhillips or BRI in order to prepare for his examination.

Respondent’s Position [ 89 ] The Respondent states that its questions are relevant and targeted. Specifically, the Respondent characterizes the request as dealing with the specific information learned and documents gathered, not the steps Mr. Delk took to inform himself. The Respondent indicates that it falls within the ambit of subsection 95(2) of the Rules that a nominee has to inform himself and make inquiries during the entire discovery process.

Burlington is not relieved of its burden of answering the questions solely on the basis that privilege ‘may’ apply - a claim that is insufficient and does not constitute a proper claim of privilege. Importantly, asserting that privilege “may” apply because the nominee is a lawyer is contrary to the purpose of discovery and obstructionist. Burlington’s Position [ 90 ] Burlington contends that these questions are irrelevant, broad and vague. In particular, it submits that Mr. Delk gave evidence as to matters he had learned as a result of having informed himself of various matters.

Burlington characterizes the Respondent’s questions as akin to a witness statement and cites case law which provides that “a party is not required to provide a

summary of the evidence of its witnesses or possible witnesses”. [ 91 ] Burlington therefore submits that the questions are improper insofar as they are questions seeking information on the steps taken by Mr. Delk to inform himself. It is of the view that the Respondent is capable of asking relevant questions that will show the product of Mr. Delk’s labours to inform himself. As well, Burlington invokes a possible privilege applying to further excuse their refusal to answer

these questions because Burlington’s nominee, Mr. Delk, is counsel. Court’s Decision [ 92 ] It was established in HSBC Bank Canada , [54] that the files reviewed by the nominee in preparation for an examination for discovery are prima facie relevant. [ 93 ] Counsel for Burlington’s objection on the basis that solicitor-client privilege “may” apply does not stand. Communications between employees and Burlington’s nominee are not privileged simply because the nominee is a lawyer.

Indeed, asserting privilege “may” apply as the nominee is counsel is contrary to the purpose of discovery. [ 94 ] The Respondent is not asking Mr. Delk to describe the steps that he took to inform himself or to provide a

summary of potential witnesses’ evidence, which have been found to be improper questions . [55] It goes without saying that the documents that are privilege do not have to be provided. Burlington has to answer the questions. Category 2: Questions relating to the necessity of the Guarantee Fees Questions 1028-1032 [ 95 ] This category involves essentially two separate but related questions: Question 1028 - Whether Burlington had to pay the guarantee fees in order for BRI to give the guarantee; and Question 1032 - Whether BRI had to charge Burlington for the guarantee fees in order to give it the guarantee.

Respondent’s Position [ 96 ] The Respondent states that these are proper questions of fact relevant to the Respondent’s theory about the purpose of the guarantee fees under paragraphs 18(1) (

a) and 20(1) (e.1) of the Act . The information sought by these questions would be relevant to understanding why the guarantee fees were incurred by Burlington, and also may be relevant in addressing whether the guarantee fees had any value at all. It is the Respondent’s position that the guarantee fees were paid, not in consideration for the guarantees, but for the sole purpose of gaining a tax benefit. Burlington’s Position [ 97 ] Burlington claims that these questions are overly vague, irrelevant and speculative.

It contends that it is unclear whether the Respondent’s question is whether the guarantee fees were legally required, commercially necessary, or “had to be paid” in some other sense. Insofar as the questions in this Category ask more than this, Burlington submits that they do not relate to any of the issues on appeal. It is of the view that whether BRI could have theoretically provided the guarantees for free does not go to whether Burlington paid the guarantee fees for the purpose outlined under paragraphs 18 (1) (

a) and 20(1) (e.1) of the Act . Court’s Decision [ 98 ] These questions do not have to be answered. The questions are speculative. Is the Respondent asking if BRI was legally required to charge guarantee fees? That said, at Question 1037 and following, Mr. Delk answered these questions. For example, at Question 1037 his answer was: A. Legally, I do not know if the guarantee fees are required or not. What I know is BRI provided the service to the Appellant and, in providing that service to the Appellant and, in providing that service, would have expected to be compensated.

Category 4: Questions relating to other guarantees in the BRI corporate family. Questions 1175, 1178, 1180, 1182, 1185, 1193, 1197, 1201, 1203, 1205-1207, 1210, 1212, 1215, 1221, 2731-2757, 2759-2780, 2782- 2831, 2833-2838, 2840-2933, 2935-2982, 2987-3032, 3035-3080, 3083-3143, 3145-3176 [ 99 ] The Respondent asked Mr.

Delk to produce any documents with respect to specified and unspecified guarantees given by BRI to related entities. [ 100 ] During the hearing, the Respondent restricted the questions to any documents relating to seven Specified Guarantees given by BRI to related entities namely, Burlington Resources Canada Exploration Ltd. (“BRCEL”), Poco Petroleum, Burlington Resources Canada Partnership, BR (Global Holdings) BV, Burlington Resources Capital, and Burlington Resources Capital II (collectively, the “Named Guarantees”).

Therefore, all questions relating to the unspecified guarantees have been withdrawn and do not have to be answered. Respondent’s Position [ 101 ] The Respondent argues that guarantees given by BRI to other non-arm’s length entities and the facts relating to those guarantees, such as whether BRI charged guarantee fees, are relevant to determining the issue of whether the guarantee fees in this appeal were

incurred for the purpose of earning income under paragraphs 18(1) (

a) and 20(1) (e.1) of the Act . The Respondent clarifies that it is not asking to view and compare the terms and conditions of other non-arm’s length guarantees.

Rather, the Respondent seeks information on the circumstances surrounding the sister corporation guarantees (i.e. whether similar hybrid subscription agreements were in place, the treatment of the recipient of the guarantee’s credit ratings, and whether the recipient was an unlimited liability company, and whether guarantee fees were paid). [ 102 ] The Respondent maintains that answers to these questions would go to establishing whether the guarantee fees were incurred for the purpose of earning or producing income from its business.

Specifically, it posits that an absence of any charge for a guarantee given to another non-arm’s length entity by BRI could suggest that the purpose of paying the guarantee fees was to obtain a tax benefit. For example, if another of BRI’s non-arm’s length subsidiaries was receiving a guarantee from BRI for no charge, then one could ask why would Burlington incur an expense for the same thing.

The answer may be that the only reason Burlington incurred the guarantee fees was to obtain a tax benefit. [ 103 ] In support of its position, the Respondent points to Justice Campbell Miller’s decision in HSBC Bank Canada - a decision which also stemmed from a refusals motion relating to a transfer pricing dispute. [ 104 ] In HSBC Bank Canada , the Respondent had asked the taxpayer to justify why it had been treated differently by the parent company than other, non-Canadian subsidiaries. [ 105 ] In response to this disputed question, Justice Campbell Miller commented that information with respect to non-arm’s length dealings may be relevant to the “factual paradigm” in which transfer pricing cases could be considered: While I appreciate that the transfer pricing provisions do not call for comparison with other non-arm’s length transactions, I can certainly see some relevance to how sister corporations were treated in connection with determining the issue of whether the fee was incurred for the purpose of earning income.

Without having to determine the relevance of circumstances surrounding the implicit support of the Parent in connection with the transfer pricing, I find that such information is generally relevant in determining the question of whether the fee was incurred for the purpose of earning income. [56] [ 106 ] Further, at paragraph 23 of HSBC Bank Canada , Justice Campbell Miller held explicitly that questions regarding differential treatment between other non-arm’s sister corporations were potentially relevant for the purposes of paragraph 18(1)(a): The question seeks the reasoning behind what on its face appears to be different treatment.

This may be relevant, again not so much for purposes of any comparison between different non-arm’s length arrangements, but to get an understanding why the fee was incurred by the Appellant. Request 9 is answerable. [ 107 ] Drawing on the above two passages, the Respondent asserts that the differential treatment of non-arm’s length entities is sufficiently relevant to the issues engaged by paragraphs 18(1) (

a) and 20(1) (e.1) of the Act to be discoverable. [ 108 ] The Respondent distinguishes the decision in GE Capital Canada [57] where Justice Valerie Miller determined that questions regarding a non-arm’s length sister corporation’s guarantees were not relevant. The Respondent argues that GE Capital Canada is distinguishable from the present matter as there was no reliance by the Respondent in GE Capital Canada on paragraphs 18(1) (

a) or 20(1) (e.1) of the Act . Because Justice Valerie Miller was not called to consider the relevance of non-arm’s length transactions to paragraphs 18(1)(

a) or 20(1)(e.1), the Respondent argues that her findings should not be read as a rejection of Justice Campbell Miller’s aforementioned conclusions. [ 109 ] Both parties also made arguments based on proportionality in relation to this Category. [ 110 ] Burlington contends that the questions in this category need not be answered due to their disproportionate nature. Ms. Hoang’s evidence, discussed at length above, is offered by Burlington in support of this position. [ 111 ] Ms.

Hoang states in her affidavit that she made inquiries of the Houston treasury department and was informed that the department does not maintain a master list of all guarantees provided to any of the entities in the ConocoPhillips Group. [58] Yet, the Respondent points out that Ms. Hoang never even asked the treasury group about BRI’s guarantees: Counsel for the Respondent: But we’re not just talking about that in general terms. We’re talking about BRI. You never had a discussion with the treasury group about BRI’s guarantees; right? Ms.

Hoang: I asked - no. [59] [ 112 ] Though the above exchange was directed narrowly at determining whether BRI ever executed a guarantee agreement or provided a guarantee to any entity or partnership other than Burlington, the Respondent submits that the fact the treasury department was never questioned on how to locate BRI’s guarantees undermines Ms. Hoang’s statement on the proportionality of responding to the questions in Category 4. [ 113 ] Additionally, Ms. Hoang’s states in her affidavit that she does not have any efficient and reliable way to respond to these questions. [60] The Respondent notes that Ms.

Hoang does not state that there is no efficient or reliable way to respond to the questions because she never asked the treasury department about how to locate BRI’s guarantees. The Respondent argues that it cannot be ruled out that such searches can be reliably conducted. [ 114 ] The Respondent also highlights the existence of a general index of what is contained in the boxes of documents of comprising ConocoPhillips’ records. Ms. Hoang stated that the existence of this general index provided little certainty as to its accuracy and completeness.

Still, the Respondent argues that the existence of this general index is an important tool in reducing the burden of this task. The Respondent contends that Ms. Hoang should be able to rely on the general index, as well as the indexes created by the treasury and other departments, to identify relevant and responsive documents related to the named guarantees. In addition, Ms. Hoang has never

consulted the ex-employees who were knowledgeable with these transactions to find out, if they could answer some of the questions and whether they knew if Burlington had given guarantee to sister corporations of Burlington. [ 115 ] To conclude, the Respondent states that Ms. Hoang has provided insufficient evidence of the onerous burden involved in responding to the questions of Category 4. The Respondent points to the indexes, including the general index, as important tools in reducing the burden of responding to these questions.

Moreover, drawing on Justice Campbell Miller’s comments in HSBC Bank Canada , the Respondent submits that the questions in Category 4 are relevant to justify the cost and effort of responding, in any event. Burlington’s Position [ 116 ] Burlington’s position is that all these questions are irrelevant because the issues on appeal relating to paragraphs 18(1) (

a) and 20(1) (e.1) of the Act are taxpayer and transaction specific. If it were to find that BRI has given guarantees without a fee to a sister corporation of Burlington, the circumstances could be so different that it would have no impact on this appeal. In addition, Burlington states that the Respondent is effectively asking it to perform a comprehensive review of all its records to determine the existence of any guarantees provided by BRI and why, including a specific search for details relating to the Named Guarantees.

Burlington claims that all of these questions are both irrelevant to the issues on appeal and onerous to answer.

Burlington submits that questions relating to guarantees involving other entities in different circumstances will not help the Court determine why it incurred the guarantee fees. [ 117 ] Burlington points to the decision in HSBC Bank Canada , where questions on the parent companies’ valuation of the explicit guarantee were refused for two reasons − first, the specific documentation sought could not be presumed to exist since any explicit guarantee by the parents would not distinguish such a guarantee’s value from the implicit guarantee provided by the parents (that is to say, such documentation would only have been produced by a third party guarantor assessing the value of its granting an explicit guarantee in light of the parents’ implicit support); and second, the information sought would not inform whether the taxpayer had paid the fee for the purpose of producing income. [61] Burlington calls attention to the latter point as clearly showing that the Respondent’s questions are irrelevant.

It also is of the view that the Respondent’s attempt to distinguish the guarantee terms and conditions at issue in HSBC Bank Canada from the Respondent’s questions on the circumstances of the guarantees in this matter is splitting hairs, as both are irrelevant for the same reasons. [ 118 ] Burlington also relies on the decision of Justice Valerie Miller in General Electric [62] and the decision of Chief Justice Rossiter in CIBC . [63] With respect to the latter decision, Burlington draws a parallel between the Named Guarantees provided by BRI to other non-arm’s-length entities and non-Enron litigation and settlements where a CIBC entity was sued along with an arm’s-length co- defendant.

In both cases, the Respondent viewed the other transactions as providing potentially useful internal comparables, and Burlington highlights that Chief Justice Rossiter found the other settlements to be irrelevant to the matter at issue. [64] [ 119 ] Burlington further submits that the assumptions to which any of these questions relate were only relevant to the application of paragraphs 247(2) (

b) and 247(2)(

d) of the Act - specifically, to the inquiry as to BRI’s motivation for charging the guarantee fees. Arguments relating to those paragraphs are no longer being advanced by the Respondent.

As a result, inquiries around BRI’s motivations for charging the guarantee fees are no longer relevant in light of the Respondent’s abandonment of its position. [ 120 ] Burlington thus requests that I conclude that the questions in Category 4 amount to a fishing expedition and need not be answered. [ 121 ] Burlington further emphasizes that any potential relevance of these questions is disproportionate to the effort it would take to properly answer them.

Requesting all facts about certain transactions, agreements and terms of such agreements are submitted to be too general and grossly disproportionate in the way they are tailored. Citing HSBC Bank Canada , Burlington submits that the questions in this Category exemplify an approach that seeks to produce as much as possible regardless of how marginally relevant it is. [ 122 ] In her affidavit, Ms. Hoang attests to the difficulty associated with locating the information needed to properly answer these questions, including a lack of complete records of guarantees given by BRI and the passage of time.

She testified in cross-examination that she would need to identify the individuals who worked on a given transaction and obtain from them information as to where responsive records would be kept. Following this, a search for any responsive documents in places identified by those individuals, if they are still able to so direct Ms. Hoang, would have to be done involving the review of multiple indexes to pull such records. Ms. Hoang emphasized that this would need to be done for many of the remaining questions.

Therefore, Burlington submits that answering the questions would be disproportionate and therefore improper as a request. [ 123 ] In response to the Respondent’s arguments on proportionality, Burlington notes that the records held by ConocoPhillips’ treasury department are not as comprehensive as the Respondent tries to make out. [ 124 ] Burlington thus submits that it has provided sufficient evidence to justify that it is too onerous to respond to the questions in Category 4 given the allegedly marginal relevance of the questions at issue.

Court’s Decision [ 125 ] I disagree with Burlington that the Respondent’s assumptions of fact to which the questions in Category 4 relate to were only relevant to the application of paragraphs 247(2) (

b) and 247(2)(

d) of the Act - whether the guarantees would not have been entered into by persons dealing at arm’s-length and can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit. It is abundantly evident that these questions instead relate to the Respondent’s theory in relation to paragraphs 18(1) (

a) and 20(1) (e.1) of the Act . [ 126 ] I am of the view that since there was no reliance by the Respondent in GE Capital Canada on paragraphs 18(1) (

a) and 20(1) (e.1) of the Act , this case is not persuasive in deciding the issues before me. GE Capital Canada must be differentiated from the present matter. For this reason, I need not to comment on the Respondent’s argument that GE Capital Canada was wrongly decided on the above point.

[ 127 ] In the case of HSBC Bank Canada , the Respondent had asked the taxpayer to justify why it had been treated differently by the parent company than other non-Canadian subsidiaries. Such questions regarding differential treatment were held to be relevant for the purposes of paragraph 18(1) (

a) of the Act . I disagree with Burlington that this conclusion was reached solely because of the existence of an intercorporate transfer pricing policy that related to both the taxpayer and its affiliates. [ 128 ] Drawing on HSBC Bank Canada , questions relating to the differential treatment between Burlington and its subsidiaries are relevant since they relate to the position of the Respondent under the paragraph 18(1) (

a) of the Act . [ 129 ] Further, contrary to Burlington’s arguments, Chief Justice Rossiter’s decision in CIBC to deny the questions directed at potential “internal comparables” is distinguishable here. The Respondent in CIBC asked broadly for information relating to non-Enron litigation that featured arm’s-length co-defendants of CIBC. The Chief Justice held that non-Enron litigation and settlements could be completely different so as to be “utterly useless as a comparator.” [65] [ 130 ] Thus, relying on HSBC Bank Canada , I find that the questions in Category 4 are relevant.

I now turn to whether if it would be too onerous to do so, taking into account the principle of proportionality. [ 131 ] The searches for the seven Specified Guarantees will be done based on the indexes maintained by each department. I do not find that this is disproportionate. In cross-examination, Ms. Hoang agreed that the indexes list essentially what documents are in the boxes. [ 132 ] I note that the Respondent has asked Burlington to provide all U.S. Securities and Exchange Commission filings relating to the guarantees. This information is in the public domain.

Drawing from HSBC Bank Canada at paragraph 54, I conclude that if Burlington or BRI has gathered this information, it should provide the information to the Respondent. However, if after an appropriate search, this information is not available, then the Respondent ought to source the information itself in relation to these questions; namely 2786, 2836, 2885, 2933, 3032, 3080, 3128, and 3176. [ 133 ] I also conclude that any question asking whether it was in the guarantors’ interest to give the guarantees to other non-arm’s length affiliates need not be answered.

In HSBC Bank Canada , questions about the parent company’s valuation of the guarantee were refused because the information sought would not inform whether the taxpayer had paid the fee for the purpose of producing income. [66] Drawing on this reasoning, questions asking about BRI’s interest in providing guaranteed to non-arm’s length affiliates are irrelevant.

Therefore, the following questions relating to the guarantors’ interest in providing these guarantees need not be answered: 2748, 2750, 2751, 2752, 2753, 2754, 2755, 2803, 2804, 2805, 2806, 2807, 2808, 2809, 2810, 2853, 2854, 2855, 2856, 2857, 2858, 2859, 2860, 2901, 2902, 2903, 2904, 2905, 2906, 2907, 2908, 2949, 2950, 2951, 2952, 2953, 2954, 2955, 2956, 3000, 3001, 3002, 3003, 3004, 3005, 3006, 3007, 3048, 3049, 3050, 3051, 3052, 3053, 3054, 3055, 3096, 3097, 3098, 3099, 3100, 3101, 3102, 3103, 3143, 3144, 3145, 3146, 3147, 3148, 3149, 3150, and 3151. [ 134 ] Finally, Ms.

Hoang states in her affidavit that questions in Category 4, as posed, could conceivably relate to all types of guarantees ever entered into with BRI including performance or contract completion guarantees. [67] I disagree. Context is important. However, for greater certainty, the questions in Category 4 relate only to financial guarantees with respect to the seven Specified Guarantees mentioned in paragraph 99 of my reasons.

Category 5: Question as to whether BRI would support its Canadian subsidiary during financial difficulties Question 703 [ 135 ] This question arose while discussing a document of Salomon Smith Barney analyzing the creditworthiness of a Canadian operating subsidiary (“BR Canada”) in which the “implied support” of BRI is viewed as having a positive impact on BR Canada’s credit quality. Against this backdrop, the Respondent asked Mr. Delk if BRI would have provided support to BR Canada (a Canadian subsidiary to whom Burlington on-loaned) if BR Canada faced financial difficulties.

Respondent’s Position [ 136 ] The Respondent contends that this is a factual question about the extent to which BRI would have demonstrated its implied support should BR Canada have needed. [ 137 ] The Respondent argues that this question is relevant. Burlington relied on the investment bank letters in substantiating its choice of a guarantee fee rate. In its opinion, the investment bank letters reference both the implied support that BRI would give, and the close ties between Burlington’s stand-alone credit quality and the subordinated credit quality of BR Canada.

Since BRI’s implied support of BR Canada would be relevant to the ability of BR Canada, as debtor of Burlington, to repay the amounts on-loaned to it from by Burlington, the Respondent submits that it is relevant to fixing the appropriate arm’s-length amount for the guarantee. Burlington’s Position [ 138 ] Burlington submits that this question is impermissibly speculative.

Counsel highlighted the uncertainty on what constitutes “financial difficulties” and emphasized that the nature of financial difficulties was not characterized by the Respondent with sufficient precision to allow anything more than a vague and speculative issue. Furthermore, Burlington cited HSBC Bank Canada , in which Justice Campbell Miller notes that questions asking a nominee to speculate on an issue that will ultimately have to be decided by the trial judge are improper.

Burlington considers that the mere fact that the investment bank letters contained speculation in support of their opinion does not mean that it is appropriate to ask Burlington to speculate. It furthermore submits that the answer would be irrelevant, as the parties are in agreement that an arm’s-length guarantor would charge more than 50 basis points for the guarantee. Finally, Burlington submits that gaining the appropriate background information as to what was transpiring between 2000 and 2005 to answer the question

accurately would be onerous. Court’s Decision [ 139 ] At the hearing, I raised the question of whether this question had already been answered. Questions 1006 et seq. [68] covered the same ground and were answered. [ 140 ] At question 1007, Mr. Delk provides the following response when discussing whether BRI would have assisted the Canadian operating subsidiaries in the event that they experienced financial problems (i.e. unable to meet their payments, potential bankruptcy): I cannot say they would, no. As I said before, there is a reason why legal entities are used.

Although a parent company and BRI would be expected to provide financial support - let’s say natural gas prices were depressed for a period of three to four years, so the company needed access to short-term funding or maybe the company needed capital to make an acquisition or needed capital in order to find its own development, then yes. If the company was bankrupt - the implied support is not unfettered support. I don’t think anybody can say that Burlington Resources Inc. would have stepped in and provided an unlimited amount of funding to its subsidiary.

It was a subsidiary, and there is a purpose for using subsidiaries. [ 141 ] Even though initially Mr. Delk may have been confused about which entities were being discussed during this line of questioning, by question 1009, it was clear that the questions related to BRI’s implied support of its Canadian operating subsidiaries. [ 142 ] In my view, Question 703 has already been answered by the responses given to Questions 1007 and 1009. Therefore, there is no need to answer Question 703.

If the Respondent wanted to ask follow-up questions, she should have done so at the time of the examination for discovery, when Mr. Delk answered Question 703. She cannot now state for the purpose of asking follow-up questions, that this question has not been answered. Category 6: Question on the concerns of BRI if Burlington was unable to meet its obligations. Question 1015 [ 143 ] The Respondent asked Mr. Delk whether BRI would have been concerned about the effect on its reputation if Burlington was unable to meet its obligations.

Respondent’s Position [ 144 ] The Respondent characterizes this as a factual question about BRI’s interest during the years under appeal. The Respondent submits that the issue of implied support by BRI is raised as a factor in the evaluation of Burlington in the investment bank letters and these letters were relied on by Burlington when deciding what guarantee fee rate to charge. Therefore, given Burlington’s position with respect to the investment bank letters, the Respondent argues that whether BRI would have been concerned if Burlington had been unable to meet its obligations is not hypothetical.

Burlington’s Position [ 145 ] Burlington submits that it is not clear what ‘concern’ means, and that the question calls for speculation. Even if implicit support is at issue in the appeal, Burlington submits that this would be a question of what BRI would do, not what its concerns would be. It is also irrelevant and would be onerous to answer, for reasons similar to those relating to Category 5. Court’s Decision [ 146 ] This question calls for speculation. There is no meaningful way to assess whether BRI would have been “concerned” and thus Mr. Delk cannot be expected to respond to this question.

Category 7: Question on the previous imputation of a credit rating Question 755 [ 147 ] The Respondent asked Mr. Delk whether BRI had previously imputed the credit rating of one “sister” corporation to another “sister” corporation. Respondent’s Position [ 148 ] The Respondent argues that this question is relevant to the issue of the operation of paragraphs 247(2) (

a) and (

c) of the Act in this case. The Respondent alleges that, according to the investment bank letters, the credit rating of Burlington may be imputed from the sister corporations to which it on-loaned funds to. The Respondent seeks to better understand this methodology, and wants to know whether BRI has employed this methodology in other instances. If BRI has not, this is helpful to the Respondent’s position because it shows that this case is an abnormality. However, to the extent that BRI has used this imputed rating methodology before, the Responde

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