Canadian Gov't Asks CAFC for Rehearing on Countervailability of Canadian Tax Program

The governments of Canada and Quebec, along with exporter Marmen Energy, vied for rehearing of a U.S. Court of Appeals for the Federal Circuit decision sustaining the countervailability of a Canadian tax program. Filing for full court or en banc rehearing of the decision, the Canadian government said the court allowed the Commerce Department to ignore "economic reality" and elevated "form over substance" (The Government of Quebec v. United States, Fed. Cir. # 22-1807)

The appellate court sustained the countervailability of the tax program, which pertains to the additional depreciation for certain Class 1 assets, in the countervailing duty investigation on utility scale wind towers from Canada (see 2406210031).

The Canadian tax system allows for depreciation deductions from taxable income. "Class 1 assets" establish depreciation rates for "three physically distinct categories of buildings," the Canadian government said. Residential buildings have a standard 4% deduction rate, manufacturing facilities have a 10% depreciation rate, and commercial buildings have a 6% rate. The appellate court described the system as imposing a standard 4% rate, with any further deductions issued in addition to this rate.

The Federal Circuit said the deductions given in addition to the "standard" 4% deduction amount to forgone revenue for the Canadian government. The court said Commerce didn't err by failing to consider that the depreciation rate is based on the "average useful life of a particular asset," finding that the agency doesn't have to consider whether the program aligns with the economic reality of building depreciation.

The Canadian government said this disregard of economic reality is at odds with the substantial evidence standard of review. Commerce's countervailability decision was based on the "mistaken belief" that the depreciation rates for certain Class 1 assets were allowed in addition to a standard rate. This take ignored the reality of Canada's depreciation schedule, which divides Class 1 into three subclauses "to reflect accurately the average useful lives of three distinct types of buildings."

The rehearing brief said nothing in the governing statute allows Commerce to "ignore economic reality when analyzing financial contribution," and, in fact, economic reality "is relevant to any question of financial contribution." In addition, the economic reality of the depreciation rates for Class 1 assets "is an evidentiary question," and not a legal one.

The Canadian government argued that the court elevated form over substance. Commerce's financial benefit finding is solely based on the creation of asset subclasses, each of which has its own depreciation rate. "Based on Commerce’s superficial approach, had Canada instead created separate classes for each building category, Commerce would not have found a financial contribution or benefit," the brief said. "This is a distinction without a difference, simultaneously ignoring the substance of the regulations as well as economic reality, contrary to the Supreme Court’s admonition that economic reality matters when interpreting tax provisions."