Canadian Forest Navigation, 2017 FCA 39: foreign rectification orders are facts the Minister cannot ignore, but they do not decide the appeal

2017 FCA 39 · Federal Court of Appeal

Author: Sas Tullo

This case asks what happens when a Canadian company receives about $250 million in dividends from its Cypriot and Barbadian subsidiaries, deducts them as foreign affiliate dividends, is reassessed, and then has the foreign courts rewrite the corporate resolutions so that the money was a loan all along. The Tax Court had said the foreign orders could not bind the Minister unless a Quebec court homologated them. The Federal Court of Appeal disagreed with that reasoning but did not hand the taxpayer a win either: the foreign orders are facts that cannot be ignored, yet their weight against the Minister is a question for trial. The decision matters to anyone contemplating foreign rectification in response to a Canadian reassessment, and to anyone deciding whether a question suits determination before trial under Rule 58.

Facts

Canadian Forest Navigation Co. Ltd. (CFN), a Canadian-controlled private corporation headquartered in Montréal (para 3), incorporated wholly owned affiliates in Cyprus in 2000 and in Barbados in 2004 (para 4). In 2005 and 2006 the affiliates’ boards, composed of the same entities that own CFN, resolved to pay dividends to CFN totalling approximately $250 million (para 5). CFN reported the transfers as dividends and claimed deductions under paragraph 113(1)(a) of the Income Tax Act (para 6).

In 2010 the Barbadian affiliate obtained an order of the Supreme Court of Barbados rectifying the resolutions retroactively so that they recorded indebtedness in the affiliate’s favour rather than dividends, and the Cypriot affiliate obtained a similar order on March 28, 2011. CFN was the named defendant in both proceedings, shared counsel with the affiliates, and consented to the relief. The Minister received no notice, though CFN informed her of each outcome afterwards (para 7). By reassessments dated December 29, 2010 and July 29, 2011, the Minister disallowed the deductions, and CFN objected on the basis that the sums were not dividends (paras 8-9). CFN appealed to the Tax Court in 2012, and in 2014 the appeal was held in abeyance so that a question of law, posed on consent under Rule 58 of the Tax Court of Canada Rules (General Procedure), could be determined first: whether the foreign rectification orders required the Minister to treat the transfers as indebtedness rather than dividends (para 10).

Issues

The question was whether the Associate Chief Justice erred in answering the Rule 58 question in the negative on the footing that the foreign orders had to be homologated in Quebec before they could bind the Minister (paras 1, 12). CFN argued that under article 2822 of the Civil Code of Québec the foreign judgments are facts that cannot be disregarded and have direct effects the Minister cannot ignore (para 14).

Holding

The appeal was allowed, the Tax Court’s judgment set aside, and the Court of Appeal declined to answer the Rule 58 question; the Rule 58 motion before the Tax Court was dismissed (para 22). Each party was to bear its own costs in both courts (para 23).

The court’s reasoning

Boivin J.A., for a unanimous panel, began with the Tax Court’s analysis. Lamarre A.C.J. had found that Quebec was the only province with which CFN had a nexus, so the Civil Code applied (para 11). She acknowledged that under article 2822 a foreign judgment is a fact that domestic courts cannot ignore even without homologation, but reasoned that homologation under article 3155 was required for enforceability in Quebec, so CFN would have to homologate the orders before they could bind the Minister (para 12).

The Court of Appeal accepted CFN’s first proposition. Under article 2822, an act purporting to issue from a competent foreign public officer makes proof of its content against all persons, so factual findings in a foreign judgment are facts that a court cannot disregard, with or without homologation (para 15), a view supported by Henri Kélada’s text on the recognition and enforcement of foreign judgments (para 16). The Barbadian and Cypriot orders were therefore proof that the resolutions had been rectified to transform the dividends into indebtedness, “no more, no less” (para 17). Homologation was a non-issue: the foreign proceedings involved CFN and its affiliates, not the Minister, a third party, so there was nothing to enforce against her, and the Associate Chief Justice’s reasoning on homologation was not pertinent (para 18).

The court rejected CFN’s second proposition: article 2822 did not make the foreign orders dispositive, and the Minister was not obliged to accept that the dividends were loans because the foreign courts said so (para 19). What remained to be decided was the orders’ effect vis-à-vis the Minister, and that answer “will necessarily depend on the evidence adduced by the parties, and the weight ascribed to the foreign orders as facts” under article 2822, a determination for the Tax Court judge with a full evidentiary record (para 20). Since the answer to the Rule 58 question would not resolve anything in the underlying appeal, the Associate Chief Justice should not have answered it (para 21).

Practical implications

The decision sits between two propositions. The position adopted below would have required a Quebec homologation proceeding before a foreign rectification order could even be considered; the Court of Appeal rejected that as beside the point, because homologation concerns enforcement against a party, and the Minister was never a party (para 18). CFN’s position would have made the foreign order conclusive of the tax character of the transfers; the court rejected that too (para 19). What survives is a modest evidentiary rule: the order proves that the resolutions now say what they say, and the trial judge decides what that is worth against the Minister (paras 17, 20).

In my view the most consequential passage is paragraph 20. It leaves open the question a reassessed taxpayer actually cares about: whether a retroactive foreign recharacterization, obtained on consent, without notice to the Minister, and years after the returns were filed, changes the result under paragraph 113(1)(a). The reasons do not decide that question or discuss the Canadian rectification jurisprudence; the Associate Chief Justice had observed only that rectification does not issue as a matter of course in Canada and is narrower in civil law than at common law (para 12). The weight of such a consent order is exactly the kind of issue that depends on evidence about the parties’ original intention.

The decision is also a Rule 58 case: a preliminary question is useful only where the answer will dispose of something, and where it depends on evidence not yet before the court, the question should not be answered at all (paras 20-21). Section 113 has been amended since the taxation years in issue, most recently in 2024 according to the Justice Laws website; paragraph 113(1)(a) still allows a deduction for the portion of a foreign affiliate dividend prescribed to have been paid out of exempt surplus, and this comment does not describe the other amendments. Rule 58 shows no amendment after SOR/2014-26. Whether an appeal was taken is not verified here.

The practical lesson is twofold. A foreign court order recharacterizing a transaction is evidence in a Canadian tax appeal, and the Minister cannot pretend it does not exist; but obtaining it does not settle the tax treatment, and the taxpayer still has to persuade the trial judge of what the transaction was.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Canadian Forest Navigation Co. Ltd. v. Canada, 2017 FCA 39, judgment delivered at Toronto on February 23, 2017, Gauthier, Stratas, and Boivin JJ.A., reasons for judgment by Boivin J.A. Reasons on the Federal Court of Appeal’s site. Also on CanLII. The decision under appeal is the judgment of Lamarre A.C.J. of the Tax Court of Canada dated February 12, 2016, cited as 2016 TCC 43 (para 1).