This decision concerned motions to amend or strike pleadings.
The taxpayer, a Nova Scotia unlimited liability company, raised U.S.$3 billion in capital by issuing notes to arm's-length parties. The notes were guaranteed by its US parent ("BRI"). The Minister disallowed the deduction of $82 million in guarantee fees under inter alia ss. 247(2)(a) and (c), but also "invoked" ss. 247(2)(b) and (d).
Hogan J found that it was "manifestly incorrect" for the Minister's Reply to refer to the "consideration for the guarantee fee" rather than "consideration for the guarantee" (para. 29). After noting that the Reply apparently had been framed this way in order to avoid compromising a theory that an arm's length person would have refused to enter into the guarantee agreement, Hogan J stated (at para. 32) that acknowledging the guarantee's existence did not contradict an argument "that an arm's length person would not have entered into the same agreement if placed in the circumstances of the parties."
Although he ordered the Minister to amend her reply, Hogan J further emphasized that doing so did not seriously undermine the potential merit of her case:
- It was legitimate for the Minister to question the value of a guarantee to an NSULC from its principal, given that a shareholder of an NSULC is liable for the NSULC's unpaid debts on a winding-up (para. 40).
- The mere fact that the guarantee arrangement may have had a bona fide non-tax purpose (i.e. obtain a guarantee to enable the taxpayer to secure financing) was not conclusive as to the primary purpose of the transaction (para. 45).