On December 4, 2009, the long awaited decision in General Electric Capital Canada Inc. v. The Queen was released by Canada's Tax Court. The issue before the Court was whether GECUS, the parent corporation of GECC, had charged an arm's length fee to GECC during the 1996 to 2000 taxation years. Briefly, the facts were that GECC had borrowed for a number of years previous to 1996, always with an explicit guarantee from its parent or another member of the GE group. In 1995, as a result of an internal review of these arrangements, GECUS made the decision to charge a guarantee fee going forward of 100 basis points or 1% on the outstanding debt of GECC. The Minister of National Revenue reassessed GECC on the basis that the financial support and other factors implicit in the non arm's length relationship between GECUS and GECC were sufficient to permit GECC to carry out its borrowing activity on the same terms and conditions that had been afforded it in the past and that the explicit guarantee therefore provided no benefit to GECC. The Minister's position was that the guarantee fee should therefore have been nil. GECC was reassessed under Part I of the Income Tax Act (Canada) (the "Act") to disallow in full the deduction of the guarantee fees and was also assessed for additional non-resident withholding tax under Part XIII of the Act on the amounts of the fees as if they had been distributed to GECUS as dividends during the years in question.
Based on the facts and circumstances and the evidence presented by 20 witnesses, 12 of whom were experts, the Tax Court found that the guarantee fees paid by GECC to GECUS were equal to or less than the amount required to satisfy the arm's length standard in subsection 69(2) and paragraph 247 (2)(a) of the Act and, accordingly, the Court vacated the Ministers assessments. However, in doing so the Court agreed with the Crown and rejected GECC's argument that in applying the arm's length standard, those factors rooted in the non-arm's length relationship between a subsidiary and its parent corporation must be ignored. While the result in the case is clearly correct, the process by which the Court arrived at its conclusion and its comments on the construction of the arm's length principle are disappointing. The decision is expected to be the subject of much discussion and interpretation over the coming months.
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