CIBC’s Enron-related tax fight ordered to trial
Bank wants to deduct $3B in settlement amounts as expenses, but CRA says no
The top judge for the Tax Court of Canada has ordered that a long-running dispute over the Canadian Imperial Bank of Commerce’s efforts to deduct about $3 billion in Enron-related lawsuit settlements and legal costs will go to trial next year.
The case stems from CIBC’s 2005 decision to settle two lawsuits it faced over its dealings with the infamous U.S. energy company, which filed for bankruptcy in 2001.
CIBC deducted the settlement amounts of approximately $3 billion (which included interest and related legal costs) from business income in the bank’s 2005 and 2006 tax years, but the Canada Revenue Agency later issued re- assessments disallowing the deductions, arguing that they do not qualify as expenses.
The bank filed notices of appeal with the Tax Court of Canada in 2010, and the case has since dragged on, in part because of fights over disclosure and discovery. In 2015, Tax Court chief justice Eugene Rossiter wrote in an order that a particular motion “seems in large part to be the result of obstruction by CIBC when it comes to the discovery process.”
Then, at a hearing in Toronto this month, Rossiter was blunt in ordering that a trial begin in February 2019.
“This case has gone on long enough,” Rossiter said.
The judge’s order was signed on Feb. 6, and includes a series of deadlines for the matter, such as that all discovery is to be completed by July 3, 2018.
Following the hearing, CIBC, Canada’s fifth-largest lender, said in a statement to the Financial Post that it “has sought an early trial date since the onset, and we are pleased one has now been set.”
Rossiter noted in the 2015 order that the outcome of the proceeding hinges on whether or not CIBC can deduct the settlement amounts as expenses. The deductions had been denied on several grounds, the judge noted in his 2015 order, including that “they were not incurred to earn and produce income from business and did not conform to well-accepted business or accounting principles.”
CIBC, according to a Federal Court of Appeal judgment, claimed its deductions were consistent with Canadian generally accepted accounting principles, or GAAP, and the Income Tax Act.
A spokesperson for the CRA said in an emailed statement that the agency could not comment on details of the case, citing the fact that it is before the courts and because of the confidentiality provisions of the Income Tax Act.
Jonathan Farrar, associate professor of accounting at Ryerson University’s Ted Rogers School of Management, said in a recent interview that the $3-billion deduction at the heart of the case is “absolutely astronomical.”
“So it’s something that the CRA is going to be treading very carefully with, because it’s worth so much in tax revenues to them,” Farrar said.
There is plenty at stake for the bank as well, which says it paid tax of approximately $1.05 billion following the reassessments that is on-deposit with the CRA until the appeal is decided.