Hedging your bets

By Jules L. Lewy & Jasmine Aujila
Illustration : Blair Kelly

Tax professionals and their clients can’t always rely on administrative practice or policy, including tax guides

The Supreme Court of Canada recently released its decision in the case of Ontario v. Placer Dome Canada Ltd., which involves a very narrow issue: namely, the interpretation of the definition of hedging in the Ontario Mining Tax Act. Nevertheless, this decision should be read by all tax practitioners because the Supreme Court rarely decides cases involving tax matters. In addition, although the interpretation of thedefinition of hedging under the Ontario Mining Tax Act is of limited interest to most tax practitioners, the general discussion by our highest court on the proper method of statutory interpretation of taxation statutes, the burden of proof in tax cases and the treatment of a tax authority’s administrative position, is both interesting and instructive.

The decision in Placer Dome
The specific question addressed by the Supreme Court was the correct interpretation of hedging, a term defined in subsection 1(1) of the Ontario Mining Tax Act to mean “the fixing of a price for output of a mine before delivery by means of a forward sale or a futures contract on a recognized commodity exchange, or the purchase or sale forward of a foreign currency related directly to the proceeds of the output of a mine, but does not include speculative currency hedging except to the extent that the hedging transaction determines the final price and proceeds for the output.” If a transaction is considered to be hedging, the gain from such a transaction is included in the computation of profit under the Ontario Mining Tax Act. Until 1998 the Ontario tax authority’s administrative position was that a financial transaction was not covered by the definition of hedging unless the transaction resulted in the delivery of output from an Ontario mine. In 1998 the Ontario tax authority changed its administrative position. Under the new policy a transaction was considered to be hedging if the transaction was entered into prior to the delivery of output, to the extent that the volume of the transaction did not exceed the productive capacity of the Ontario mine. Therefore hedging could include financial transactions that did not result in the physical delivery of output.

In accordance with the Ontario tax authority’s administrative position prevailing at the time, Placer Dome excluded the gain from certain financial transactions in calculating its profits under the Ontario Mining Tax Act for its 1995 and 1996 tax-ation years. Placer Dome was reassessed in 2000, after the Ontario tax authority’s administrative position had changed and the minister included the gains from the financial transactions in Placer Dome’s profits for purposes of the statute. Placer Dome appealed the reassessments and was unsuccessful in the Supreme Court.

Interpretation of taxation statutes
In its unanimous decision in Placer Dome, the Supreme Court discussed the general principles to be applied in interpreting taxation statutes. The court repeated its previous pronouncements that the “modern approach applies to taxation statutes no less than it does to other statutes. That is, the words of an act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the act, the object of the act and the intention of Parliament.” The Supreme Court went on to state “because of the degree of precision and detail characteristic of many tax provisions, a greater emphasis has often been placed on textual interpretation where taxation statutes are concerned.” However, “taxpayers are entitled to rely on the clear meaning of taxation provisions in structuring their affairs.” Therefore,where the words of a taxation statute are precise and unequivocal, the words will play a dominant role in the interpretative process. “Where the words of a statute give rise to more than one reasonable interpretation, the ordinary meaning of words will play a lesser role, and greater recourse to the context and purpose of the act may be necessary.” If there are ambiguities, “the courts must undertake a unified textual, contextual and purposive approach to statutory interpretation” to resolve ambiguities.

The Supreme Court summarized the principles of interpretation by stating that when a provision of a taxation statute “admits of no ambiguity in its meaning or in its application to the facts, it must simply be applied. Reference to the purpose of the provision cannot be used to create an unexpressed exception to clear language.” However, in a situation such as interpreting the definition of hedging in the Ontario Mining Tax Act, where there was ambiguity in the definition, “greater emphasis must be placed on the context, scheme and purpose of the Act. Thus, legislative purpose may not be used to supplant clear statutory language, but to arrive at the most plausible interpretation of an ambiguous statutory provision.”

The Supreme Court acknowledged that there is a residual presumption in favour of the interpretation that favours the taxpayer; however, it is only a residual presumption and only applies in the exceptional case where application of the ordinary principles of interpretation doesn’t resolve the issue.

The principles of interpretation enunciated by the Supreme Court in Placer Dome are consistent with previous Supreme Court decisions in Stubart, Canada TrustcoMortgage Company, 65302 British ColumbiaLtd., and Notre-Dame de Bon-Secours and provide a very useful summary for tax practitioners who are attempting to interpret a provision of a taxation statute.

Burden of proof
All tax practitioners are aware that generally, the burden of proof in litigating a tax case lies on the taxpayer. The issue of burden of proof is an important one in tax litigation because the party with the burden of proof has the duty to establish his case. If such party fails to satisfy the burden of proof, he will be unsuccessful in his appeal and will fail in the litigation. This is referred to in certain decisions and articles as the “risk of nonpersuasion.”

The principle that was enunciated by the Supreme Court in the leading decision in Johnston v. Minister of National Revenue is that the taxpayer bears the burden of establishing that the facts assumed by the tax authority in issuing an assessment are wrong, because it is the taxpayer who generally has the knowledge relating to the facts and is in the best position to prove any relevant facts. In the Ontario Court of Appeal decision in Placer Dome, the majority held that in general, the burden of proof rests with the tax authority in the case of interpreting a provision imposing a tax obligation and with the taxpayer in the case of interpreting a provision relating to a tax exemption. This finding was based on a statement in the Supreme Court decision of Notre-Dame de Bon-Secours. However, in its decision in Placer Dome, the Supreme Court did not follow its previous statement. The Supreme Court confirmed that the taxpayer bears the burden of displacing the tax authority’s factual assumptions but went on to state that the concept of burden of proof is not applicable to the interpretation of a statute, which is a question of law. Therefore, in a case such as Placer Dome, where the issue is the interpretation of a provision of a taxation statute, which is a question of law, there is no burden of proof on either party. Rather, the duty to ascertain the correct interpretation lies with the court.

Interestingly, the Supreme Court in Placer Dome also dealt with the burden of proof in cases involving the general anti-avoidance rule (GAAR). The court repeated its statements in Canada Trustco that in respect of GAAR, the taxpayer is not required to disprove that he or she has violated the object, spirit or purpose of a taxation provision. Rather, it is the tax authority that is in a better position than the taxpayer to make submissions as to the legislative intent behind particular taxation provisions. In addition, it is the tax authority that is obliged to identify the purpose of the relevant taxation provisions and to show how that purpose would be frustrated or defeated by the taxpayer’s arrangements. The Supreme Court distinguished the burden of proof in a GAAR appeal in respect of showing the object and spirit of a taxation provision, with a situation such as Placer Dome because in it the issue was the determination of the meaning of a provision of a taxation statute that is ambiguous. As noted, in such a situation, there is no burden of proof on either party because the duty to ascertain the correct interpretation lies with the court.

Reliance on administrative practice
The Supreme Court also dealt with Placer Dome’s argument that the tax authority’s administrative practice at the relevant time in respect to hedging should be considered and noted that the tax authority’s earlier administrative policy had been changed (albeit after the relevant taxation years in issue). As can be expected, Placer Dome argued that the tax authority’s change to its administrative practice was arbitrary and unfair. In addition, Placer Dome presented evidence that the tax authority had argued the earlier administrative practice on which Placer Dome had relied in another judicial proceeding.

To the court, the change in an administrative practice by a tax authority is only reflective of an ambiguity and such change of an administrative practice cannot be relied upon by a taxpayer as an interpretative tool except to support the view that the definition falls short of being clear, precise and unambiguous. The court repeated its previous discussion in Nowegijick that administrative practice can be an important factor in the case of doubt involving the interpretation of legislation, but emphasized that a tax authority’s administrative practice is not determinative in interpreting legislation. The court noted that the tax authority, having decided a former interpretation was incorrect, isn’t precluded from changing its practice and, whenever a tax authority does so, inevitably different taxpayers will be taxed differently under the same provision, depending on whether they are assessed before or after the change in administrative practice.

Conclusion
The Placer Dome decision is an important reminder to tax professionals and their clients that they can’t rely on administrative practice or policy, including technical interpretations, tax guides and interpretation bulletins published by a tax authority. Any interpretation, guide, bulletin or other administrative position or policy can be changed by a tax authority at any time with retroactive effect. In practice, when a tax authority changes an administrative practice, such a change is usually applicable only in respect of future fiscal periods of a taxpayer. However, legally the tax authority isn’t bound by its administrative position and as evidenced by Placer Dome, a tax authority can retroactively change its position in a manner that adversely affects a taxpayer who relied on the position. Furthermore, a taxpayer’s assertion that he or she is being treated unfairly because of his or her reliance on an administrative position is not relevant in a court proceeding because the court is not bound by administrative pronouncements or policies. Courts interpret tax statutes based on the rules of interpretation and jurisprudence, and in this regard administrative practices and policies are of little relevance other than to show an ambiguity in the legislation. Accordingly, tax professionals and clients should hedge their bets by properly interpreting tax statutes and by limiting their reliance on administrative practices and policies.

Jules L. Lewy is a partner and Jasmine Aujila is a summer student with Fraser Milner Casgrain LLP in Toronto

Technical editor: Trent Henry, CA, leader of international tax services with Ernst & Young. in Toronto