Case Comment on BlackBerry Limited v. The King 2023 TCC 137
The matter of BlackBerry Limited v. The King 2023 TCC 137 (hereinafter, “Blackberry”) is an interim judgement on a motion by the Crown to preclude two expert reports from being accepted into evidence by the Tax Court of Canada (“TCC”). We at Dominion Tax Law have had our own battles with the Crown at the TCC over the acceptance of expert reports into evidence. Our experience has broadly been that if you can get your expert reports in, you stand a good chance of winning. If not, then not.
The issue in Blackberry involves whether or not, back in 2010, the parent corporation in Canada ought to have paid tax on profits earned by its subsidiary in the United States of America (“US”) from doing contract research work for the Canadian parent. Yes, that is correct; pursuant to Canada’s Foreign Accrual Property Income (“FAPI”) rules under the Income Tax Act (Canada) (the “Act”), if subsidiaries of Canadian corporations that earn ‘passive income’ (everything that is not ‘active business income’ or “ABI”), the Canadian parent corporation has to pay Canadian tax on said foreign passive profits. Blackberry Canada paid Blackberry US to do research, and since doing research for a fee is service income, which is deemed by the FAPI rules to be passive income not ABI, the US profit of a US company is bizarrely taxable in the hands of the Canadian parent. Normally, the Canadian parent would get tax credit in Canada against the tax on FAPI for all of the tax paid in the US on the US profit by the US subsidiary. As a result, because of such tax credits, usually no net tax is payable on the FAPI attributed to the Canadian parent when the foreign subsidiary operates in a jurisdiction with a roughly comparable level of corporate tax. However, in this case, Blackberry US received US research and development (“R&D”) tax credits, wiping out the US tax on the US profit, so there was technically no US tax paid. Consequently, the Canada Revenue Agency (“CRA”) contends that Blackberry Canada has to pay tax in Canada on the FAPI attributed to the ‘passive income’ profits of Blackberry US.
And if you think that last paragraph was hard to read, I deliberately dumbed it down for the non-tax-lawyer reader because, as Bocock J. stated in this decision, the FAPI rules are notoriously “an inch thick and a mile deep.” It is actually much more complicated than the above summary.
Unfortunately, based on my read of the case, Blackberry Canada is dead in the water; they will eventually lose because the FAPI rules just are what they are and just do what they do. But that is only my opinion based on what has been provided in the decision so far.
However, that has not stopped Appellant’s counsel from fighting the good fight by trying to argue that their client is not offside the rules on a ‘purposive’ reading of the Act because Blackberry Canada did not violate the objective of the Act to prevent the erosion of the tax base in Canada. To this end, counsel to the Appellant wanted to put into evidence two expert reports.
The first report was by Mr. Brad Rolph, a transfer pricing economist, partner with Grant Thornton Consulting and, for most of the past decade was National Leader of Grant Thornton’s transfer pricing practice in Canada. In a nutshell, his report was arguing that Blackberry Canada had several other ways of arranging its affairs in compliance with the Act regarding its R&D activities and the economic exploitation of the consequential intellectual property created, and each of them would have resulted in less tax payable in Canada. However, Blackberry deliberately chose the structure that would not harm Canada’s tax base, and indeed resulted in more tax payable in Canada than all of the legally acceptable alternatives. The conclusion Blackberry wants the TCC to draw from this is that hitting it for extra FAPI tax when it was already being a ‘good Canadian corporate citizen,’ and paying more tax in Canada than it would otherwise have to, would somehow be wrong.
The second report was by Dr. Jack Mintz Ph.D., a tax policy economist, professor and former chair of the Technical Committee on Business Taxation, which committee authored the 1997 Report to the Minister of Finance on Business Taxation (the “Technical Report”) which established the basis for the current FAPI Rules. Professor Mintz is a very big name in the very small Canadian tax policy world. Professor Mintz’ expert report also argues that the intent of the Act is to prevent the erosion of the Canadian tax base, and as a result, since Blackberry Canada’s arrangements did not erode the tax base, they should not be interpreted as offside of the rules.
The Appellant was not very successful; Professor Mintz’ report was rejected completely and only part of the transfer pricing report was accepted. As stated above, this does not bode well for Blackberry.
The test for the inclusion of expert reports in Canadian law was initially articulated by the Supreme Court of Canada (“SCC”) in Mohan and subsequently clarified in White Burgess. The two steps are first “threshold admissibility” which is itself a four-part test, and a second step referred to as the “gatekeeper function,” which effectively gives the presiding judge broad discretion to exclude expert evidence. If that seems like a lot of hoops to jump through, you are right. But, in my opinion, that is because of the criminal law origin of the test, which in my humble opinion is a cause of many of the problems with the admissibility of expert evidence in the TCC, which does not decide matters of criminal law. The fact that White Burgess was a tax case does not really help, because there was no fundamental review of the issues more commonly faced in the TCC.
The four sub-tests of the first stage consist of the following four questions: a) is the evidence logically relevant; b) is it necessary to assist the trier of fact; c) are there other exclusionary rules; and lastly, d) is the expert properly qualified. Other than the first step, which is usually not a problem because the expert is testifying as to something relevant to the case, all three other sub-questions are problematic at the TCC level.
The second test addresses whether the report “is necessary to enable a judge, as a trier of fact, to appreciate the matters in issue due to their technical nature.” Which makes sense, because although judges can be expected to know the law, and in a specialized court like the TCC, are expected to know a lot about a very specific law, i.e. the Act, they are not knowledgeable about technologies, industries, science and the like. However, my view is that this test should be treated as more than a test, and rather as the driving principle. Rather than judges examining only whether the report is necessary in order not to exclude, necessity should in fact be seen as the core premise that needs to be overwhelmed by the totality of the other factors in order to exclude. The fact is, when it comes to companies, industries and technologies, judges do not know anything at all. NOTHING. As a result, expert reports are critical to a judge being able to address the specifics of the case. As Chief Justice Rossiter recently noted in Canafric, TCC cases need to be decided based on “the circumstances of the case”. The circumstances of the case in the TCC are very often driven by the specifics of a taxpayer’s specific technology and industry, particularly in the cases that we tend to fight. In the absence of expert opinion, the judges of the TCC really have no understanding at all of what the circumstances are, and as a result are effectively operating blindly if they exclude an expert report for other reasons when there is a necessity for them to understand the facts with the help of an expert.
Most of the discussion around necessity revolves around whether or not the expert is usurping or attempting to usurp the trier of fact’s (i.e., the judge’s) jurisdiction by making findings of law. In the criminal context, this distinction is fairly obvious; for example, a fingerprint expert can testify that the latent prints left at the scene of the crime are a ‘match’ for those of the accused, up to a certain level of likelihood. However, a fingerprint expert cannot go on to say, “therefore the accused is guilty.” That next bit is for the judge or jury to decide, not the expert.
In the TCC however, what is the ‘match’ vs. what is the conclusion, is merely a matter of semantics. For example, if an expert concludes that prior to a company creating a specific software in year X, there was no such software in existence in the open market, which is effectively saying that there was a ‘technological advance’ in creating that software. The existence of a technological advance is a necessity in obtaining Scientific Research and Experimental Development investment tax credits. What if the expert report makes the statement that the taxpayer “advanced the technology by creating the X software…”? Is that usurping the judge’s role of making legal determinations?
One of the biggest problems that we have had with expert reports is that in the TCC context, because we are often dealing with a specific company with a specific technology in a specific industry, our experts are “subject matter experts” and NOT experts at being witnesses. Our experts know their technology and their industry, but they have never been in court nor drafted an expert report. As a result, they tend not to understand the subtle lines, they tend not to suffer fools gladly nor do they mince words. Unfortunately, this tends to set the court off, because, if it seems like our experts are saying “this technology did not exist prior to X year, and therefore the Minister’s assumption that there was no technological advancement by the taxpayer is absolutely stupid, and anyone who knows anything about the industry would know that…”, it is because that is exactly what they are saying. Of course, as counsel, we could re-write the expert reports and take out the bits where the real experts appear to step over the line, but then whose report is it? Is it the expert’s report or counsel’s report? In the past, we have tended to err on the side of ethics and authenticity. However, that has proven to have been a mistake in more than one case.
In Blackberry, it is on this test of necessity where the expert reports flounder. Not with regard to the circumstances of the case, but rather as to whether the reports are overstepping. In the view of Bocock J.:
Section 3 of the Rolph Report contains clever and fulsome opinions on why the Minister reassessed the Appellant contrary to the Minster’s policy, the FAPI and FAT provisions, and the mutuality of Canada’s obligations under the OECD Guidelines and international tax policy. These are, when distilled, opinion evidence of the interpretation of domestic law and, as such, they are inadmissible.
In a nutshell, the expert did exactly what our experts tend to do, which is call out the Minister on their stupid assessments, but again the TCC does not like it when experts do that. In this case, however, Bocock J. has a point, because the expert went way too far in discussing the law and not the facts and “circumstances of the case.”
Professor Mintz’ report was also effectively trying to tell the court how it ought to interpret the law. Interpreting the law is the judge’s job, not the experts. Also, his chairmanship of the Technical Report does not give him any additional powers of understanding over that document because the court has the Technical Report itself to read. Effectively, as Bocock J. rules “the Technical Report is the best evidence of the Technical Report.”
In Blackberry, rather than flogging a dead horse, Bocock J. stopped his analysis there and did not need to deal with any of the other factors or tests. As a result, we will also leave off our commentary at this point as well. The upshot is that judges of the TCC tend to be protective of their turf and toss a lot of reports for overstepping. My view is that, although in this case I completely understand why Bocock J. clipped Mr. Rolph’s and tossed Professor Mintz’ reports, the judges of the TCC are perhaps a little too oversensitive given that the line between fact and law is a lot more ambiguous for non-lawyers. For me once a judge has decided that expert opinion is necessary to understanding the taxpayer’s circumstances, there has to be an overwhelming reason to exclude, or the judge is deciding they would rather be completely blind than use their discretion to parse and weigh the expert evidence.
And Blackberry is going to lose this case. But those are both just my opinions.