Executive Summary: Key Legal and Evidentiary Issues

• The Respondent was granted leave to file a Second Amended Reply, introducing the thin capitalization rules as an alternative basis for disallowing interest deductions.

• The dispute centers on whether interest on $300,000,000 in borrowings was deductible, with the Minister arguing ineligibility under both the purpose test and thin capitalization rules.

• The amendments were permitted under subsection 152(9) of the Income Tax Act, which allows alternative arguments or bases, provided the assessed amount does not increase.

• The Appellant’s claim of prejudice due to lack of access to corporate minute books was addressed by the Respondent’s concession regarding the timing of a $52,000,000 equity injection.

• The Court found that the alternative argument based on thin capitalization rules relates to the same transaction as the original assessment.

• Costs of the motion will be in the cause, and the Appellant has the opportunity to respond to the Second Amended Reply.

Background and facts of the case

Oldcastle Building Products Canada Inc. (“Oldcastle”) appealed assessments and determinations by the Minister of National Revenue relating to its 2012, 2013, and 2014 taxation years. The appeal originally challenged two main issues: (i) an assessment for failure to withhold and remit non-resident tax under Part XIII of the Income Tax Act (“Act”) for the 2012 calendar year, by notice of assessment dated March 14, 2018 (“Part XIII Assessment”), and (ii) a determination under the general anti-avoidance rule (GAAR) regarding the paid-up capital of its common shares as at September 12, 2012, by notice of determination dated March 28, 2018 (“GAAR Determination”). The Minister’s actions stemmed from a series of transactions that occurred between July 28, 2011 and September 13, 2012 (“Series of Transactions”), which included a $300,000,000 return of capital funded by borrowings.

On March 2, 2021, Oldcastle expanded the appeal to include reassessments for the 2012 taxation year (by notice of reassessment dated July 24, 2020), and the 2013 and 2014 taxation years (by notices of reassessment dated October 15, 2020) (collectively, “Part I Reassessments”). The Part I Reassessments disallowed the Appellant’s deduction of interest expense on debt obligations that the Appellant inherited or incurred concurrently with the Series of Transactions. The Minister’s position was that $300,000,000 of the Appellant’s outstanding borrowings during the 2012, 2013, and 2014 taxation years was used for the purpose of funding a $300,000,000 return of capital on the Appellant’s common shares on September 13, 2012, which was an ineligible purpose in the Appellant’s circumstances, according to the Minister.

Policy terms and statutory provisions at issue

The dispute involves the interpretation and application of several provisions of the Income Tax Act:

• Paragraph 20(1)(c): Governs the deductibility of interest on borrowed money used for income-earning purposes.

• Subsections 18(4)–(8): The thin capitalization rules, which limit interest deductibility when a Canadian corporation is capitalized with excessive debt from certain non-residents.

• Subsection 152(9): Permits the Minister to advance alternative arguments or bases in support of an assessment, provided the total assessed amount does not increase.

The motion and parties’ positions

In the first half of 2024, the Respondent sought the Appellant’s consent to further amend its Amended Reply to plead the thin capitalization rules in subsections 18(4) and (5) of the Act as an alternative basis for supporting the disallowance of interest expense under the Part I Reassessments (“Thin Cap Amendments”). Having failed to secure the Appellant’s consent, on July 31, 2024, the Respondent filed its notice of motion for leave from the Court to do so. The amended pleading that the Respondent sought leave to file is the Reamended Reply.

The Appellant opposed, arguing that the Thin Cap Amendments should not be allowed because, notwithstanding subsection 152(9) of the Act and the permissive tenor of the jurisprudence towards allowing a party to amend its pleadings at any stage of proceedings, the relevant jurisprudence prohibits the Minister from amending its pleadings to advance the positions reflected in the Thin Cap Amendments, and that the Appellant would suffer prejudice that would not be compensable by costs.

The Respondent’s position was that subsection 152(9) of the Act allows the Minister to rely on the thin capitalization rules as an alternative argument or basis to support the denial of interest expense on $300,000,000 of borrowings that is already in issue in the appeal, and that the applicable jurisprudence allows a party to amend its pleadings at any stage of proceedings if it assists the tribunal in determining the real questions in controversy, does not result in injustice to the other party not compensable by costs, and serves the interest of justice.

Court’s analysis and outcome

Justice Yuan found that the 2016 amendments to subsection 152(9) of the Act were intended to broaden the Minister’s ability to advance alternative arguments or bases, including those involving different legal theories or sources of income, provided the total assessed amount remains unchanged. The Court held that the thin capitalization argument related to the same transaction—the $300,000,000 borrowing—as the original assessment and did not increase the tax payable.

The only potential prejudice identified by the Appellant was the lack of access to the corporate minute books to demonstrate that a $52,000,000 subscription for equity in the Appellant was made in March 2013. The Respondent stated that it was prepared to concede that the equity injection occurred at the start of 2013 or on March 28, 2013. In light of the Respondent’s concession, the Court found there would be no prejudice to the Appellant arising from the lack of access to the relevant minute books.

As a result, the motion to amend was allowed, permitting the Respondent to file a Second Amended Reply reflecting these changes. The Appellant shall have until August 22, 2025 to file and serve the Second Amended Reply. Should the Appellant wish to file an Answer to the Second Amended Reply, it shall have until 30 days after service of the Second Amended Reply to file and serve its Answer in response to the amendments reflected in the Second Amended Reply. Costs of the motion will be in the cause. No specific monetary amount was awarded at this stage, as the order relates to pleadings and not the final determination of the tax liability.