Cases
The Queen v. Superior Plus Corp, 2015 FCA 241, aff'g 2015 TCC 132
The Superior Plus Income Fund (the "Fund") effectively converted (in accordance with the distribution method contemplated under s. 107(3.1)) into a public corporation using an existing corporation (the taxpayer, a.k.a. "Old Ballard") with non-capital losses and other tax attributes as the new corporate vehicle - rather than using a new corporation. The transactions were designed to ensure that there was no acquisition of control of the taxpayer (which would have resulted in a streaming of its losses). In particular, although the unitholders of the fund became shareholders of the taxpayer, this was considered not to entail an acquisition of control of the taxpayer by a group of persons. Subsequent to the conversion, s. 256(7)(c.1) was introduced, which would have deemed there to be an acquisition of control of the taxpayer, if it had had retroactive effect (which it did not). The Minister disallowed the use of the tax attributes, on the basis that there in fact had been an acquisition of control of the taxpayer or, alternatively, under s. 245(2) (i.e., GAAR).
At the discovery stage, the taxpayer moved to compel the Minister to answer various questions, or to produce documents, or previously redacted portions of documents previously requested under the Access to Information Act, which CRA had resisted principally on the grounds of irrelevance. The questions included whether the Department of Finance considered making the 2010 SIFT amendments retroactive, why it had changed its explanatory notes to say that s. 256(7)(c.1) "clarified" rather than "extended" the change-of-control rules and whether the Attorney General agreed that initially the policy choice of the SIFT conversion rules was to allow the use of existing corporations. Requested documents included GAAR Committee minutes including comments of individual members (whereas CRA had provided only the final Recommendation of the Committee), and correspondence between CRA and Finance (resulting in the drafting of s. 256(7)(c.1))and between the GAAR Committee and Aggressive Tax Planning, with the questions seeking particulars on the questions posed above and policy considerations brought to bear on this file, and respecting what initially may have been diffidence on the part of Finance as to how to proceed, if at all.
Following the reasons in Birchcliff, Hogan J in the Tax Court granted the taxpayer's motion in the main (including all the above-mentioned questions and documents).
In the Court of Appeal, Noël CJ stated (at para. 8):
As was held…in Lehigh Cement Ltd. v. R., 2011 FCA 120… information pertaining to the policy of the Act, even where it is not taxpayer specific, can be relevant on discovery. …
Inter-Leasing, Inc. v. Ontario (Revenue), 2014 ONCA 575
In order to minimize provincial income tax, a Canadian corporate group restructured so that various intercompany debts were owing (on a back-to-back basis through an intermediate company) to the taxpayer which, although it was resident in Canada and had a permanent establishment in Ontario for other tax reasons, was exempt from tax on the interest income by virtue of an exemption in the Corporations Tax Act (Ontario) for income from property earned by a corporation which had been incorporated outside Canada (here, the British Virgin Islands.) For more detail see under s. 115(1)(b) – and respecting the BVI situs issue, see summary under TA, s. 54(2)(b).
In finding found that Ontario's GAAR did not apply, as there was no abuse of the relevant provision, Pardu JA stated (at para. 55) that "in 1959, Ontario adopted the place of incorporation test [for residence], unlike the federal government and all other provinces," referred (at para. 60) to "the deliberate decision not to tax corporations incorporated outside Canada on income from property" and (at para. 61) noted that Copthorne stated that "in some cases the underlying rationale of a provision would be no broader than the text itself." She then stated (at paras. 62, 66):
Here, the purpose of s. 2(2) of the OCTA was to tax corporations incorporated outside Canada with a permanent establishment in Ontario on income from business but not on from income from property. Where such a corporation structures its affairs to earn income from property rather than income from business, it has not…defeated the underlying rationale of the provision… .
The approach taken by the appeal judge - to define the purpose of the provision as to raise revenue and to define the tax base as broadly as possible - renders "abusive" any transaction that has the effect of reducing tax. I do not accept that approach.
In rejecting an argument that situating the specialty debt instruments in the British Virgin Islands was an abusive transaction, Pardu JA noted (at paras. 95-7) that "the rule governing the situs of specialty debts instruments is a long-standing and well-established rule," "the situs for the instruments was not arbitrary, but was a place to which the corporation had some link, namely, its place of incorporation," and "the level of [the taxpayer's] activity in Ontario to generate the income from property was minimal."
The Queen v. Global Equity Fund Ltd., 2013 DTC 5007 [5526], 2012 FCA 272
The taxpayer subscribed for common shares of a new subsidiary for approximately $5.6 million, which then declared a stock dividend in the form of preferred shares having $56 of paid-up capital and a $5.6 million redemption price. Consequently, the value of the common shares was largely eliminated. (The taxpayer's subscription for an additional $200,000 was acknowledged to be "window dressing" to give the common shares some value.) The taxpayer (which was involved in the business of trading securities) disposed of the common shares in consideration for their depleted value and reported a business loss.
Mainville J.A. found that the transactions were abusive of ss. 3, 4, 9, and 111. He stated (at para. 62):
The fundamental rationale underlying these provisions is that, in order to be used for taxation purposes, business losses must be grounded in some form of economic or business reality. As noted in Canderel at para. 53, "[i]n seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer's profit for the year." That same common sense principle applies to a business loss, thus harmonizing the concept of business loss with the related concept of profit under the Act.
The Court concluded that the taxpayer's transactions were "nothing more than a paper shuffle," that "nothing was gained or lost," and that it would "defeat the underlying rationale of sections 3, 4, 9 and 11" for such paper losses to avoid "the payment of taxes otherwise owed on the profits resulting from the real-world business operations of Global" (para. 66-68).
The Minister argued in the alternative that no business loss had in fact occurred, given that the shares had not been acquired as inventory or as part of an adventure in the nature of trade. These arguments had not been raised at trial and entailed new evidence, and were therefore disallowed (paras. 35-37).
1207192 Ontario Limited v. The Queen, 2012 DTC 5157 [at 7396], 2012 FCA 259, aff'g 2011 DTC 1301 [at 1686], 2011 TCC 383
This was a companion case to Triad Gestco.
The taxpayer, which had realized a capital gain of $2,974,386, transferred cash and marketable securities with a value of $3 million to a newly-incorporated subsidiary ("Newco") as the subscription price for common shares of Newco. Newco then paid a stock dividend to the taxpayer consisting of preferred non-voting shares having a nominal paid-up capital and a total redemption value (in the hands of the initial holder) of $3 million, thereby effecting a "value shift" away from the common shares. Special voting shares of Newco having nominal value were issued to a trust for members of the family of the sole shareholder of the taxpayer ("Mr. Cross"). The taxpayer then sold the common shares of Newco to a second family trust for the sum of $100 and claimed a capital loss of nearly $3 million.
Paris J. denied the capital loss under s. 245(2). The taxpayer had clearly engaged in an avoidance transaction, and the transaction was an abuse of s. 38(b) of the Act. He stated (at TCC paras. 90, 92):
I find that the Respondent has shown that the purpose of paragraph 38(b) is to recognize economic losses suffered by a taxpayer on the disposition of property. The Respondent has also shown that despite the repeal of subsection 55(1) [a provision specifically aimed at stopping artificial capital losses such as surplus-stripping], the policy of the Act is still to disallow the artificial or undue creation or increase of a capital loss, which underlines the intention to allow capital losses only to the extent that they reflect an underlying economic loss. ...
These transactions did not reduce the Appellant's economic power in the manner contemplated by Parliament in allowing for the deduction of capital losses.
In accordance with its conclusions in Triad Gestco, the Court of Appeal affirmed Paris J.'s reasoning. Furthermore, in response to the taxpayer's argument that the main purpose of the transaction was to effect creditor protection for Mr. Cross, Sharlow J.A. stated (at FCA para. 20):
I am unable to accept this argument. In my view, Justice Paris followed the correct approach when he determined the purpose of the series of transactions on an objective basis – that is, by ascertaining objectively the purpose of each step by reference to its consequences – rather than on the basis of the subjective motivation of Mr. Cross, or his subjective understanding of what may or may not have been required to achieve creditor protection.
Triad Gestco Ltd. v. The Queen, 2012 DTC 5156 [at 7385], 2012 FCA 258
The taxpayer, which was directed and controlled by Mr. Cohen, and which had realized a capital gain of approximately $8 million, transferred $8 million of assets to a newly-incorporated subsidiary ("Rcongold") in consideration for the issuance of common shares. Rcongold declared a stock dividend of $1 on its common shares, which was payable through the issuance of 80,000 non-voting preferred shares with an aggregate redemption price of $8,000,000 and (presumably) a stated capital of $1. An unrelated individual settled, with $100, a trust of which Mr. Cohen was a beneficiary, so that under the "affiliate" definition then in effect it was an un-affiliated trust. The taxpayer then sold its common shares of Rcongold to the trust for $65 and claimed a capital loss of $7,999,935, which permitted it to offset the realized capital gain through a loss carry-back.
After noting (at para. 39) that after the taxpayer's disposition of its common shares it "was neither richer nor poorer," Noël J.A. (while citing Ramsay) stated (at para. 41) that "the capital gain system is generally understood to apply to real gains and losses" as contrasted to "paper gains or losses" (para. 44), so that, under the general capital loss provisions of the Act, there was:
relief as an offset against capital gain where a taxpayer has suffered an economic loss on the disposition of property... [and] offsetting a capital gain with the paper loss that was claimed [here] results in an abuse and a misuse of [these] relevant provisions... . (Para. 50.)
The Court found that the trial judge erred in his alternative finding that s. 40(2)(g)(i) reflects a general policy against the deduction of losses "within an economic unit" (paras. 54-56). Finally, although there was a corresponding accrued but unrealized gain on the taxpayer's preferred shareholding, the taxpayer had not "put forth a credible scenario indicating that the preferred shares were to be sold" (para. 59).
The taxpayer's appeal was dismissed.
Canada Safeway v. Alberta, 2012 DTC 5133 [at 7271], 2012 ABCA 232
This case was a companion decision to Husky Energy.
An Alberta taxpayer ("CSL") borrowed $600 million from its Alberta parent ("CSHL") over the course of a month, and used the borrowed funds to repay commercial paper which it previously had borrowed for an income-producing purpose. At the same time as these borrowings occurred, CSL paid dividends totaling $600 million to CSHL. CSHL then assigned the $600 million of debt to another subsidiary ("SOFC") which had been incorporated in the British Virgin Islands but had a permanent establishment in Ontario. CSL paid interest to SOFC, SOFC paid dividends to CSHL, and CSHL would make further loans to CSL. CSL deducted the interest paid to SOFC in computing its income for Alberta purposes, SOFC was not taxable in Ontario on the interest it received from CSL, and CSHL claimed the intercorporate dividend deduction respecting the dividends it received from SOFC.
In the course of finding that the series of transactions was not subject to Alberta's general anti-avoidance rule (on similar reasoning to Husky), Hunt J.A. stated (at para. 38):
I am not persuaded by Alberta's argument that Safeway did not "need" to borrow $600 million... . It is clear that a taxpayer is free to replace retained earnings with borrowed money and doing so does not by itself show that the purpose of section 20(1)(c) has been frustrated: Lipson at para 41; see also Ludco and Singleton.
Husky Energy v. Alberta, 2012 DTC 5132 [at 7262], 2012 ABCA 231
An Alberta corporate taxpayer within the Husky group of companies ("Operations") used the proceeds of loan repayments received from other Alberta taxpayers within the group (the "Subsidiaries" - who had borrowed those proceeds from a bank) to subscribe for equity in a subsidiary ("Central") which had been incorporated in the British Virgin Islands but which was resident in Ontario. Central used the subscription proceeds to make an interest-bearing loan to another (BC) subsidiary of Operations ("West") which, in turn, on-lent those funds at interest to the Subsidiaries. The Subsidiaries deducted the interest payments made by them to West, West included those payments in its income and deducted the interest paid by it to Central - however, Central was not required to include such interest payments in its income for Ontario corporate income tax purposes. Central applied the untaxed interest payments so received by it to make dividend payments to Operations, which claimed the intercorporate dividend deduction.
Further transactions were engaged, which were viewed as raising the same issues under the general anti-avoidance rule ("GAAR") in the Alberta Corporate Tax Act (ACTA), which is essentially identical to the federal GAAR.
The Court dismissed the Minister's submission that the Subsidiaries' deduction under 20(1)(c) of the interest payments to West, and Operations' claiming of the intercorporate dividend deduction under s. 112(1), abused those provisions. The principle of corporate non-consolidation, set out in para. 97 of Copthorne, requires that each corporation's tax liability be considered independently (para. 47). It was therefore irrelevant for the Subsidiaries' tax position that Central had no corresponding income inclusion on the interest payments (paras. 45-46), and it was irrelevant for Operations' tax position that dividends from Central came from a non-taxable stream of income (paras. 52-56).
Copthorne Holdings Ltd. v. The Queen, 2012 DTC 5006 [at 6536], 2011 SCC 63
The ultimate controlling family members decided that a Canadian subsidiary ("Copthorne I") should be amalgamated with a wholly-owned subsidiary of Copthorne I ("VHHC Holdings"), whose shares had a nominal fair market value but a paid-up capital of approximately $67 million. (The high paid-up capital of the shares of VHHC Holdings reflected the fact that it had previously been capitalized with those amounts by another family-owned Canadian-resident corporation, before it dissipated that capital through making a bad investment.) In order to preserve the paid-up capital in the shares of VHHC Holdings, the amalgamation was not accomplished as a vertical amalgamation. Instead, Copthorne I sold its shares of VHHC Holdings for a nominal amount to Copthorne I's non-resident parent company prior to a horizontal amalgamation of Copthorne I and VHHC Holdings (and some other Canadian corporations) to continue as Copthorne II.
With a view to effecting a substantial distribution to its non-resident shareholder (and after Copthorne II had amalgamated with another Canadian corporation to continue as Copthorne III), Copthorne III redeemed preferred shares held by the shareholder, with no Part XIII tax being withheld in light of the high paid-up capital of those shares.
After observing that s. 87(3) provides for the cancellation of the paid-up capital of a subsidiary on its vertical amalgamation, Rothstein J. stated (at para. 122):
Having regard to the text, context and purpose of s. 87(3), I would conclude that the object, spirit and purpose of the parenthetical portion of the section is to preclude preservation of PUC of the shares of a subsidiary corporation upon amalgamation of the parent and subsidiary where such preservation would permit shareholders, on a redemption of shares by the amalgamated corporation, to be paid amounts as a return of capital without liability for tax, in excess of the amounts invested in the amalgamating corporations with tax-paid funds.
Accordingly, the GAAR assessment was appropriate (para. 127):
The sale of VHHC Holdings shares to [the shareholder] circumvented the parenthetical words of s. 87(3) and in the context of the series of which it was a part, achieved a result the section was intended to prevent and thus defeated its underlying rationale. The transaction was abusive....
St. Michael Trust Corp. v. The Queen, 2010 DTC 5189 [at 7361], 2010 FCA 309, aff'd sub nom Fundy Settlement v. Canada, 2012 DTC 5063 [at 6881], 2012 SCC 14
After finding against the taxpayers on the grounds inter alia that two Barbados trusts were resident in Canada, Sharlow, J.A. found that if Barbados trusts were in fact entitled to a treaty exemption based on their residence in Barbados, this would not result in a misuse or abuse of that Convention given that the treaty exemption (para. 90):
...flows from the fact that in the Barbados Tax Treaty, Canada has agreed not to tax certain capital gains realized by a person who is a resident of Barbados. If the residence of the trust is Barbados for tax purposes, the trusts cannot misuse or abuse the Barbados Tax Treaty by claiming the exemption.
Lehigh Cement Ltd. v. The Queen, 2010 DTC 5081 [at 6844], 2010 FCA 124
After the terms of the debt owing by the taxpayer to a non-resident affiliate were amended so that they would comply with various requirements of the withholding tax exemption in s. 212(1)(b)(vii), the non-resident affiliate sold to an arm's length Belgian bank the right to be paid all interest payable under the debt for a sum of approximately $42.7 million, with the non-resident affiliate being required to buy back the sold interest coupon for a specified price in the event of a default by the taxpayer.
In rejecting a submission of the Crown that this transaction resulted in a misuse of such withholding tax exemption because the transaction did not result in the taxpayer "accessing funds in an international capital market" (para. 25) (which the Crown suggested was the purpose of the exemption, based on a brief statement in the related Budget papers respecting its introduction) Sharlow, J.A. noted (at para. 37) that the Crown had been unable to "establish by evidence and reasoned argument that the result of the impugned transaction is inconsistent with the purpose of the exemption, determined on the basis of a textual, contextual and propulsive interpretation of the exemption" (emphasis on the original) and that "no trace of the alleged fiscal policy can be discerned or reasonably inferred from subparagraph 212(1)(b)(viii) itself, from the statutory scheme of which subsection 212(1)(b)(viii) is a part, or from any other provision of the Income Tax Act that could possibly be relevant to its textual, contextual and purposive interpretation.
The Queen v. Remai Estate, 2009 DTC 5188 [at 6257], 2009 FCA 340
In order to make promissory notes that he had donated to a charitable foundation cease to be non-qualifying securities, the taxpayer arranged for the Foundation to sell those promissory notes to a corporation ("Sweet") owned as to 90% by his nephew, with Sweet issuing notes with identical terms to the Foundation as consideration for the purchase.
In rejecting a submission of the Crown that the "non-qualifying security" provisions of the charitable gift rules were intended to prevent donors from claiming a charitable tax credit for the value of the gift when they still retain control of the funds from which the obligation would be satisfied (which was the case on the facts in this case), the Court noted (at para. 58) that nothing in the text of the provisions supported this purpose, and that the associated Budget statements instead referred only to loan-back situations, which was not the case in the transactions under consideration before the Court.
Collins & Aikman Products Co. v. The Queen, 2009 DTC 1179 [at 958], 2009 TCC 299, aff'd 2010 DTC 5164 [at 7293], 2010 FCA 251
The taxpayer ("Products"), which was a corporation resident in the U.S., transferred the shares of its subsidiary ("CAHL"), which was non-resident in Canada notwithstanding that it had been incorporated in Canada in 1929, to a newly incorporated Canadian-subsidiary of Products ("Holdings") in consideration for a common share of Holdings that had a paid-up capital equal to the fair market value of CAHL. After CAHL became resident in Canada (as a result of its central management and control moving to Canada), CAHL paid dividends to Holdings, which distributed the same amounts to Products as distributions of paid-up capital.
In finding that it was not abusive for the stepped-up paid-up capital of the common share of Holdings to be utilized by Products to receive a distribution free of Part XIII tax, Boyle, J. rejected the Crown's submission that there was a scheme under the Act that should treat most distributions as subject to tax (noting (at paragraph 72) that any alleged legislative purpose "should be demonstrably evident from the provisions of the Act"), and noted (at paragraph 86) that the real reason the reorganization plan "worked" was that CAHL was a non-Canadian holding company whose shares were not taxable Canadian property and were excluded from the application of s. 212.1. On the appeal, Sharlow J.A. remarked: "We see no reason to conclude that the limited scope of those provisions was anything other than a deliberate policy choice by Parliament."
After finding for the taxpayer, Boyle J. went on to reject a taxpayer submission that there was no use of s. 84(4) and therefore no misuse of s. 84(4) because s. 84(4) did not apply: s. 84(4) applies every time a corporation returns capital even if a deemed dividend does not arise.
Landrus v. The Queen, 2009 DTC 5085 [at 5840], 2009 FCA 113
A partnership of which the taxpayer was a member ("Roseland II") and another partnership ("Roseland I") owning a similar and adjacent condominium development, sold all their assets to a newly-formed partnership ("RPM") with the purchase price being paid by way of set-off against the subscription price for the partnership interests in RPM, with such partnership interests in RPM being distributed to the partners of Roseland I and II.
In response to a submission of the Crown that various stop-loss provisions in the Act evidenced "a general policy to disregard dispositions of property to persons amongst related parties or parties within 'the same economic unit", Noël, J.A. noted (at para. 44) that "the precise and detailed nature of these provisions show that they are intended to deny losses in the limited circumstances set out in these provisions" and stated (at para. 47) that "where it can be shown that an anti-avoidance provision has been carefully crafted to include some situations and exclude others, it is reasonable to infer that Parliament chose to limit their scope accordingly." After noting (at para. 56) that he accepted "that the transactions in issue would be arguably abusive if they had given rise to the tax benefit in circumstances where the legal rights and obligations of the Respondent were otherwise wholly unaffected," he went on to note that here the changes in the position of the taxpayer were "material both in terms of risk and benefits" (para. 57) given that as a result of the transactions, the taxpayer acquired an undivided interest in assets that were double in size and shared in an expanded rental pool. Finally, having regard to the "overall result" test established in the Lipson case, the overall result in this case did not frustrate the object, spirit and purpose of the relevant stop loss provision (s.20(16)). Accordingly, the Crown's appeal was dismissed.
Lipson v. The Queen, 2009 DTC 5528, 2009 SCC 1
The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal under an interest-bearing demand promissory note in order to purchase some of the shares of a family corporation from the taxpayer for that sum, with the sale proceeds being used by the taxpayer to purchase a family home. The next day, a mortgage loan on the home received from the Bank was used to retire the demand promissory note. The taxpayer did not report a capital gain on the sale of the shares (on the basis that the inter-spousal rollover in subsection 73(1) applied) and included in the computation of his income both the dividends on the shares purchased by Jordanna, and the interest expense incurred by her on the mortgage loan, on the basis that the attribution rules in subsection 74.1(1) applied.
Lebel J. found (at para. 42):
"As ... the purpose of s. 74.1(1) is to prevent spouses from reducing tax by taking advantage of their non arm's length relationship when transferring property between themselves ..., the attribution by operation of s. 74.1(1) that allowed Mr. Lipson to deduct the interest in order to reduce the tax payable on the dividend income from the shares, and other income, which he would not have been able to do were Mrs. Lipson dealing with him at arm's length, qualifies as abusive tax avoidance ... . Indeed, a specific anti-avoidance rule is being used to facilitate abusive tax avoidance.":
Respecting the position of Rothstein, J. who, in his dissenting reasons, stated (at para. 108) that "if there is a specific anti-avoidance rule [such, as here, s. 74.5(11)] that precludes the use of an enabling rule to avoid or reduce tax, then the GAAR will not apply", Lebel J. stated (at para. 45):
"Where the language of and principles flowing from the GAAR apply to a transaction, the court should not refuse to apply it on the ground that a more specific provision - one that both the Minister and the taxpayers considered to be inapplicable throughout the proceedings - might also apply to the transaction."
The Queen v. MIL (Investments) S.A., 2007 DTC 5437, 2007 FCA 236
In March 1993 an individual ("Boulle") transferred his shares of a Canadian public junior exploration company ("DFR") to the taxpayer, which was a newly-incorporated Cayman Islands company wholly owned by him. By June 1995, the taxpayer exchanged, on a rollover basis pursuant to s. 85.1, a portion of its DFR shares (which had substantially appreciated) for common shares of a large Canadian public company ("Inco"), with the result that the taxpayer's shareholding in DFR was reduced below 10%. This result positioned the taxpayer to clearly fit within an exemption from Canadian capital gains tax under Article XIII of the Canada-Luxembourg Income Tax Convention (the "Treaty") on a subsequent disposition of that block of shares once the taxpayer became resident in Luxembourg. In July 1995, the taxpayer was continued into Luxembourg, in August 1995 the taxpayer sold its shares of Inco and in August 1996 it sold its DFR shares to Inco.
In rejecting the submission of counsel for the Crown that the claiming of exemption under the Treaty on the August 1996 sale represented an abuse or misuse, Pelletier, JA stated (at para. 6-7):
"It is clear that the Act intends to exempt non-residents from taxation on the gains from the disposition of treaty exempt property. It is also clear that under the terms of the Tax Treaty, the respondent's stake in DFR was treaty exempt property. The appellant urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose.
If the object of the exempting provisions was to be limited to portfolio investments, or to non-controlling interests in immoveable property (as defined in the Tax Treaty [including real estate company shares]), as the appellant argues, it would have been easy enough to say so. Beyond that, and more importantly, the appellant was unable to explain how the fact that the respondent or Mr. Boulle had or retained influence or control over DFR, if indeed they did, was in itself a reason to subject the gain from the sale of the shares to Canadian taxation rather than taxation in Luxembourg."
The Court also summarily dismissed an argument that the Treaty should not be interpreted so as to permit "double non-taxation", i.e., a result where there was no income tax under the laws of either jurisdiction.
The Queen v. Mathew, 2005 DTC 5538, 2005 SCC 55
An insolvent trust company ("STC") transferred a portfolio of mortgages with unrealized losses to a partnership of which a wholly-owned subsidiary was a general partner and in which it received a 99% interest ("Partnership A"). S.18(13) deemed the cost of the mortgages to be the same to Partnership A as their cost to STC. STC sold its partnership interest in Partnership A to a second partnership ("Partnership B") of which the taxpayers were members. Partnership A realized the losses on the mortgage portfolio, allocated 90% of the loss to Partnership B which, in turn, allocated those losses to its partners including the taxpayers.
In finding that the transactions defeated the purposes of s. 18(13) and the partnership provisions of the Act, the Court stated (at p. 5546):
"Section 18(13) preserves and transfers a loss under the assumption that it will be realized by a taxpayer who does not deal at arm's length with the transferor. Parliament could not have intended that the combined effect of the partnership rules and s. 18(13) would preserve and transfer a loss to be realized by a taxpayer who deals at arm's length with the transferor."
Canada Trustco Mortgage Co., v. The Queen, 2005 DTC 5523, 2005 SCC 54
The taxpayer purchased trailers from the U.S. user of the trailers ("TLI"), with the taxpayer appointing TLI as its agent to hold title on its behalf. The taxpayer leased the trailers to an English company ("MAIL") which in turn subleased the trailers to TLI. TLI then immediately made a lump sum prepayment of all the rents payable by it under the sublease, and MAIL used a portion of this sum to make a deposit with the bank that had helped fund the purchase by the taxpayer of the trailers in an amount equal to the bank loan and paid the balance of the prepayment to a Jersey affiliate of the bank on the condition that the affiliate use those funds to purchase a Government of Canada bond to be pledged to secure MAIL's obligations under the lease.
The claiming by the taxpayer of capital cost allowance on the acquired trailer was consistent with the object and spirit of the capital cost allowance provisions of the Act which did not, except in specified circumstances, reduce cost to reflect a mitigation of economic risk. Accordingly, the transactions did not defeat or frustrate the object, spirit or purpose of the capital cost allowance provisions read textually, contextually and purposively.
The Queen v. Imperial Oil Ltd., 2004 DTC 6044, 2004 FCA 36
The Court affirmed the finding of the Tax Court that the claiming of an investment allowance by the taxpayer on short-term loans made by it close to the end of its calendar fiscal period to a bank subsidiary, with the loans being guaranteed by the parent bank, did not result in a misuse or abuse for purposes of s. 245(4). The taxpayer was not indirectly lending money to a bank, as the business of the borrower was different than that of its parent and the money was available for use by it and not the bank; and "the fact that the bank guaranteed the loan did not make it a borrower of the money lent" (p. 6054). Although the taxpayer "took advantage of a loophole in the statutory scheme, namely the failure to deal with the consequences of different corporate year ends" ... "it must have been perfectly foreseeable to Parliament that large corporations would make short term loans to other large corporations which span the end of the lender's financial year, but not the borrower's, so that both corporations would escape that LCT on the amount of the loans" (p. 6055). Further, the Court could not agree with the Minister's submission "that there is a clear policy that a corporation's capital at the end of the fiscal year should be representative of its capital throughout the year", as Parliament had not chosen to require companies to report the value of their capital at several points during the year (p. 6055).
The Queen v. Donahue Forest Products Inc., 2003 DTC 5471, 2002 FCA 422
In order to realize an allowable business investment loss on its investment in a corporation ("DMI") held jointly by it and a third party ("Rexfor"), the taxpayer and Rexfor formed a new corporation ("DMI 1993") owned jointly by them, arranged for DMI to transfer all its assets and liabilities to DMI 1993 save for two sawmills worth $2.5 million and $2.5 million of debt owing to a third party, and then sold the shares of DMI to an unrelated third party for nominal consideration.
In finding that realization of the loss did not result in a misuse or abuse, Noël, J.A. stated (at p. 5475) that:
"There is nothing in the Act that bars a taxpayer from realizing a loss on the sale of shares to arm's length third parties, even if a significant portion of the assets to which the loss on the shares may be attributed remains within the group of corporations."
Novopharm Ltd. v. The Queen, 2003 DTC 5195, 2003 FCA 112
A profitable Canadian corporation ("Novopharm") acquired losses approximating $20 million of an arm's-length corporation ("Lossco") through a complicated series of transactions, which in simplified form were as follows:
- two special-purpose subsidiaries of Lossco formed a limited partnership ("Millbank") which borrowed $195 million from First Marathon Capital Corporation ("FMCC") and lent $195 million to First Marathon Inc. ("FMI") with FMI then immediately paying $20 million to Millbank as a prepayment of one year's interest and Millbank utilizing $20 million to pay down the principal of loan owing by it to FMCC to $175 million;
- Lossco acquired a 99.99% limited partnership in Millbank shortly thereafter (and immediately prior to the first fiscal year end of Millbank) thereby resulting in $20 million of income of Millbank being allocated to it, which eliminated its losses;
- the 99.99% partnership interest was transferred for nominal consideration by Lossco to an indirect special purpose subsidiary of Lossco ("540") and 540 then was sold to Novopharm;
- FMCC lent $175 million to Novopharm which used those proceeds to subscribe for shares of 540; 540 made a capital contribution of the same amount to Millbank, which paid off the $175 million loan owing by it to FMCC;
- a year later after $20 million of interest had accrued on the loan owing by Novopharm to FMCC, FMI repaid the $195 million principal amount owing by it to Millbank, Millbank distributed this sum to its partners (substantially 540), 540 purchased for cancellation most of the shares of Novopharm and 540 for $195 million (giving rise to a deemed dividend of $20 million), and Novopharm used the $195 million to discharge the amount owing by it to FMCC (including the $20 million of interest).
The deduction of interest by Novopharm was a result that was contrary to the object and spirit of the Act (given that the sole purpose of the series of related transactions "was solely to create a net interest deduction for Novopharm that reduced its income, the antithesis of the object of subparagraph 20(1)(c)(i), to create an incentive to accumulate capital with the potential to produce income") and the transactions were not in accordance with normal business practice (and instead "were pre-ordained, circular and limited in time" (p. 5205)). Accordingly, s. 245(1) of the Act as it applied in June 1987 denied the deduction of the interest along with fees that were incurred in connection with entering into the transactions.
The Queen v. Canadian Pacific Ltd., 2002 DTC 6742, 2002 FCA 98
The taxpayer borrowed 216 million in Australian dollars under debentures bearing interest at 16.125% per annum and that had been issued at a 2% premium and then, under a master swap agreement: exchanged the Australian dollar principal amount for Japanese yen at the current spot rate of exchange; swapped the Japanese yen proceeds for Canadian dollars at the current spot rate of exchange; under a series of forward contracts agreed to purchase Australian dollars using Japanese yen on the interest payment date and the principal maturity date; and agreed to exchange Canadian dollar payments for Japanese yen at the relevant future dates. The effect was to convert the proceeds of the debenture issues into Canadian dollars as soon as it received the borrowed funds, and to secure the future delivery of foreign exchange necessary to make the periodic payments of interest and to retire the principal. Sexton J.A. rejected a submission of the Crown that the taxpayer's act of denominating the debentures in Australian dollars was in and of itself a transaction.
In rejecting a submission that there was an abuse because the borrowing was structured so as to result, in effect, in the deduction of Canadian dollar principal payment (i.e., the high nominal rate of Australian-dollar interest was matched with a capital gain that would be realized on maturity under the forward arrangements), Sexton J.A. indicated that the amounts labelled as interest clearly were interest and that "a transaction cannot be portrayed as something which it is not, nor can it be recharacterized in order to make it an avoidance transaction."
OSFC Holdings Ltd. v. The Queen, 2001 DTC 5471, 2001 FCA 260
After becoming insolvent, a company ("Standard") in the mortgages business established a partnership, transferred a mortgage portfolio to the partnership and, prior to the end of the partnership's first fiscal year, sold its 99% direct interest in the partnership to the taxpayer who then sold a portion of its partnership interest to other parties. S.18(13) deemed the partnership to have the same cost amount for the portfolio as Standard, with the result that losses generated on the sale of the portfolio were allocated to the taxpayer and the other partners, rather than to Standard.
Although, in the view of the majority, the transactions did not result in a misuse of subsection 18(13) having regard to the policy of that provision (which was to preclude the transferor from realizing a loss on a disposition of non-capital property to a non-arm's length transferee, and to preserve the loss for recognition on a later occasion by the transferee), the transactions resulted in an abuse having regard to the general policy of the Act against the trading of non-capital losses by corporations, subject to specific limited circumstances. Accordingly, the denial of the losses to the taxpayer under s. 245 was confirmed. Rothstein J.A. noted that the Court should proceed cautiously in carrying out the unusual duty imposed upon it under s. 245(4) to invoke policy to override the words Parliament had used.
Longley v. The Queen, 99 DTC 5549 (B.C.S.C.)
Quijano J. found that GAAR would not apply to an arrangement under which taxpayers made contributions to a fringe political party on the basis that the money would be spent by the party on matters for the benefit of the taxpayer.
See Also
Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232
Shortly after it became a public company, a predecessor ("Birchcliff") of the taxpayer entered into an agreement for a major acquisition of producing oil and gas properties and also negotiated a plan to merge with a corporation ("Veracel"), which had discontinued its medical equipment business, in order to access Veracel's non-capital losses and credits. Investors subscribed for subscription receipts of Veracel and received voting common shares of Veracel therefor under a Plan of Arrangement, Veracel and Birchcliff amalgamated immediately thereafter under the Plan, and the proceeds were used in the purchase of the oil and gas properties. The previous Veracel shareholders could elect to receive retractable preferred shares on the amalgamation, which most did.
As the voting common shares received by the investors on the amalgamation represented "a majority of the voting shares of the amalgamated entity (the "Majority Voting Interest Test")" (para. 13), no acquisition of control of Veracel occurred under s. 256(7)(b)(iii)(B), so that the loss-streaming rules under s. 111(5) were avoided. In upholding the Minister's finding that this avoidance was an abuse under s. 245(4), Hogan J stated (at paras. 105, 106):
[T[he Majority Voting Interest Test indicates that Parliament did not want amalgamations and reverse takeovers being used as techniques to avoid an acquisition of control in situations where the original Lossco shareholders do not collectively receive shares representing a Majority Voting Interest in the combined enterprise.
…Parliament adopted the Majority Voting Interest Test to prevent Lossco from being subsumed by Profitco without an acquisition of control of Lossco.
HMRC v Pendragon plc, [2015] UKSC 37
A scheme, which exploited a UK VAT rule which was intended to avoid double-taxation, so as to avoid tax, was found to be abusive. See summary under ETA, s. 274(4).
Superior Plus Corp. v. The Queen, 2015 TCC 132, aff'd supra
The Superior Plus Income Fund (the "Fund") effectively converted (in accordance with the distribution method contemplated under s. 107(3.1)) into a public corporation using an existing corporation (the taxpayer, a.k.a. "Old Ballard") with non-capital losses and other tax attributes as the new corporate vehicle - rather than using a new corporation. The transactions were designed to ensure that there was no acquisition of control of the taxpayer (which would have resulted in a streaming of its losses). In particular, although the unitholders of the fund became shareholders of the taxpayer, this was considered not to entail an acquisition of control of the taxpayer by a group of persons. Subsequent to the conversion, s. 256(7)(c.1) was introduced, which would have deemed there to be an acquisition of control of the taxpayer, if it had had retroactive effect (which it did not). The Minister disallowed the use of the tax attributes, on the basis that there in fact had been an acquisition of control of the taxpayer or, alternatively, under s. 245(2) (i.e., GAAR).
At the discovery stage, the taxpayer moved to compel the Minister to answer various questions, or to produce documents, or previously redacted portions of documents previously requested under the Access to Information Act, which CRA had resisted principally on the grounds of irrelevance. The questions included whether the Department of Finance considered making the 2010 SIFT amendments retroactive, why it had changed its explanatory notes to say that s. 256(7)(c.1) "clarified" rather than "extended" the change-of-control rules and whether the Attorney General agreed that initially the policy choice of the SIFT conversion rules was to allow the use of existing corporations. Requested documents included GAAR Committee minutes including comments of individual members (whereas CRA had provided only the final Recommendation of the Committee), and correspondence between CRA and Finance (resulting in the drafting of s. 256(7)(c.1))and between the GAAR Committee and Aggressive Tax Planning, with the questions seeking particulars on the questions posed above and policy considerations brought to bear on this file, and respecting what initially may have been diffidence on the part of Finance as to how to proceed, if at all.
Following the reasons in Birchcliff, Hogan J granted the taxpayer's motion in the main (including all the above-mentioned questions and documents). The scope of "relevance" in discovery is extremely broad. Hogan J stated (at para. 33):
As correctly pointed out by the Appellant's counsel, discovery serves a much broader purpose than eliciting evidence that is admissible at trial. For example, the discovery process allows the parties to gauge the weakness of their opponent's case.
Certain documents were irrelevant, or contained specific portions that should be redacted because of privilege, and certain questions improperly asked the Minister to draw conclusions of law.
Barrasso v. The Queen, 2014 CCI 156
The taxpayer, who had realized a capital gain of $30 million earlier in the year, subscribed for Class A common shares of a corporation newly incorporated by him ("Immeubles Molibec") in consideration for a demand promissory note of $22.5 million. The next day, Immeubles Molibec paid a stock dividend to the taxpayer consisting of preferred shares having a nominal paid-up capital and a total redemption value of $22.5 million, thereby effecting a "value shift" away from the common shares. On the same day, the taxpayer sold all his common shares to his two sons for their nominal value, and realized a capital loss of approximately $22.5 million. He engaged in similar transactions in the two subsequent years to realize capital losses of approximately $35 million and $7.5 million.
The taxpayer sought to distinguish 1207192 and Triad Gestco on the basis that he was an individual rather than a corporation (so that offsetting gain would be realized on the preferred shares no later than his death) and had sold to his sons rather than family trusts. Paris J considered that "the fact that the appellant is an individual and not a corporation does not change the academic ["théorique"] nature or quality of the claimed losses" (para. 19) as "during the years under appeal, the appellant simply had not sustained a financial loss from the sale of the shares to his sons" (para. 20), and furthermore, "as in Triad Gestco, the taxpayer has not presented any evidence that he had sold the shares received as a stock dividend and has not requested an adjustment to the tax attributes arising under the application of the GAAR to take into account an eventual sale of the shares" (para. 21). Respecting the second point, the "decisions… in the two cases would have been the same irrespective of the identity of the share purchaser… with whom the taxpayer did not deal at arm's length" (para. 23).
His appeal from reassessments denying the losses under GAAR was dismissed.
Descarries v. The Queen, 2014 DTC 1143 [at 3412], 2014 TCC 75
The six taxpayers, who were siblings (or a step-daughter of their deceased father), held all the shares, having an aggregate fair market value (FMV), adjusted cost base (ACB) and paid-up capital (PUC) of $617,466, $361,658 and $25,100 respectively, of a Canadian real estate company (Oka). They sought through the transactions described below to reduce the deemed dividend of $592,362, that otherwise would have arisen on the redemption of their shares, to approximately $265,505 (see 4 and 7 below [minor discrepancy in figures]). CRA assessed on the basis that a deemed dividend of the larger amount had been realized, as there had been an indirect distribution from Oka described in s. 84(2).
- Oka lent $544,354 to a newly-incorporated company (9149) in December 2004.
- In March 2005, the taxpayers exchanged their shares of Oka under s. 85(1) for Class B and C preferred shares of Oka, so that they realized a capital gain of $361,658 (which was offset by the current year's capital loss realized in 4 below and a carryback of the capital loss in 7 below) and with the Class B and C preferred shares having ACBs of $269,618 and $347,848 and low PUC.
- They exchanged their shares of Oka for Class A common shares of 9149 having an ACB and PUC of $347,848 (with such PUC "step-up" complying with s. 84.1) and Class B preferred shares of 9149 having an ACB and PUC of $269,618 and nil.
- Also in March 2005, 9149 redeemed the Class A common shares for their PUC and ACB of $347,848 (so that no deemed divided or capital gain resulted) and redeemed approximately ¾ of the Class B preferred shares, giving rise to a deemed dividend and capital loss of $196,506 to the taxpayers.
- Oka sold its real estate in December 2005, but with title issues not resolved until December 2006.
- Oka was wound-up into 9149 in December 2006, with the loan in 1 being extinguished.
- At the end of 2008, 9149 redeemed the (¼) balance of the Class B preferred shares for $69,000, giving rise to a deemed dividend and capital loss to the taxpayers of $69,000 and $73,112.
In finding that the transactions abused the object of s. 84.1, Hogan J stated (at paras. 56, 59):
The tax specialist was aware of the fact that section 84.1 of the Act would cause the Class B shares issued by 9149 [step 3] to have an adjusted cost base that is higher than their paid-up capital, which would prevent the additional value accumulated before 1971 from being used to strip Oka of its surpluses. However, applying this rule ensures that the redemption of these shares will generate a capital loss that is sufficient to erase the capital gain realized in the preceding step, namely, the internal rollover of Oka's common shares [step 2].
...
The result of all three transactions ... is that the tax-exempt margin made it possible for part of Oka's surplus to be distributed to the appellants tax-free in a manner contrary to the object, spirit or purpose of section 84.1 of the Act.
Having regard to $66,940 of capital gain having been realized on the death of the taxpayers' father, the Minister was directed to assess on the basis that the taxpayers received a deemed dividend of $525,422.
Pièces Automobiles Lecavalier Inc. v. The Queen, 2014 DTC 1126 [at 3319], 2013 TCC 310
A Canadian subsidiary ("Greenleaf") of Ford U.S. paid down to $9,750,000 (including accrued interest) a debt of $24,369,439 (plus accrued interest) owing by it to Ford U.S. through the application of share subscription proceeds of $14,843,596 received by it from Ford U.S.A. and the application of a small amount of cash on hand of $100,706. Eighteen days later, a predecessor of the taxpayer ("392"), which was at arm's length with Ford U.S., purchased all the shares of Greenleaf from Ford U.S. for consideration of $1, and purchased the debt at only a slight discount to the amount owing, so that the debt-parking rules in ss. 80.01(6) to (8) did not apply. The Minister applied s. 245(2) on the basis that Greenleaf had sustained a debt forgiveness in the amount of the debt-paydown.
In dismissing the taxpayer's appeal, Bédard J found (at para. 126-127) that the transactions were abusive having regard to s. 80(2)(g) (TaxInterpretations translation):
The spirit and object of paragraph 80(2)(g) are to ensure that, when a debt is settled in exchange for shares, the debt forgiveness rules apply by taking into account the actual value of the shares which are issued. ... In adopting this paragraph, the legislator sought to prevent a taxpayer from transforming a debt into shares with low value, thereby avoiding the debt forgiveness rules. ... In proceeding in two stages rather than effecting a direct conversion of debt to shares, the appellant circumvented the application of paragraph 80(2)(g) and, thus, a gain on debt settlement.
Gwartz v. The Queen, 2013 DTC 1122 [at 640], 2013 TCC 86
The taxpayers ("Brianne and Steven") were minors and beneficiaries of a family trust (the "Trust"). The Trust held all the common shares (as well as Class C preferred shares) of a management corporation ("FHDM") for a dental practice of the beneficiaries' father (Dr. Gwartz). The following transactions occurred:
- 1a. In 2003 and again in 2005, FHDM declared a stock dividend consisting of 150,000 Class D preferred shares, redeemable and retractable for $1 each, and having a total paid up capital of $1 (300,000 shares, $2 total PUC).
- 1b. In each of 2003 to 2005, the Trust disposed of 75,000 Class D shares to Dr. Gwartz for a $75,000 promissory note.
- 2. In 2005, Dr. Gwartz sold the 225,000 Class D shares to a numbered corporation ("206"), wholly owned by Dr. Gwartz's spouse, for $225,000 in promissory notes.
- 3. FHDM redeemed 206's Class D shares for $225,000.
- 4. Both sets of notes were repaid out of such redemption proceeds, effecting a transfer of $225,000 from 206 to the Trust.
The Trust reported a capital gain of $74,999.50 from step 1b for each of 2003 to 2005, which it allocated to the taxpayers for inclusion (as to the taxable capital gains portions) in their returns. The Minister reassessed the taxpayers under the general anti-avoidance rule on the basis that, by effecting the realization of capital gains and their distribution to the beneficiaries, rather than the distribution of taxable dividends, the series of transactions had abusively circumvented s. 120.4 of the Act. (The Minister conceded that reassessment of Steven's 2005 taxation year should be vacated as he was 18 in that year.)
Hogan J. allowed the taxpayers' appeals. Although s. 120.4 was circumvented, there was no abuse. He stated (at para. 65):
The fact that specific anti-avoidance provisions were enacted long before the introduction of section 120.4 leads me to infer that Parliament was well aware of the fact that taxpayers could arrange to distribute corporate surpluses in the form of taxable dividends or of capital gains subject to the application of those specific anti‑avoidance provisions. The fact that those provisions were not amended and that a specific rule was not included in section 120.4 to curtail well-known techniques leads me to infer that Parliament preferred simplicity over complexity when it enacted section 120.4.
The present case was distinguishable from Triad Gestco, which involved the creation of an artificial capital loss, rather than the shifting of an already-accrued capital gain on common shares of a taxpayer to other shares (namely, the Class D shares) of the taxpayer.
Swirsky v. The Queen, 2013 TCC 73, 2013 DTC 1078 [at 431], aff'd 2014 FCA 36
Paris J. noted obiter (at para. 75) that Overs v. The Queen, 2006 TCC 26, "has been implicitly overruled by the Lipson decision."
Birchcliff Energy Ltd. v. The Queen, [2013] 3 C.T.C. 2169, TCC Docket 2012-1087 (IT) G
The Reply of the Minister to the taxpayer's Notice of Appeal stated that "the Appellant sought to avoid the acquisition [of] control rules in the Act in order to utilize the tax pools of Veracel," but did not specify the object, spirit and purpose of the provisions of the Act (the "Policy") which CRA had determined had been abused in assessing the taxpayer under the general anti-avoidance rule. Before ordering "that the Respondent disclose what Policy the assessor relied upon in making the assessment as a material fact" (para. 24), Campbell J. stated that "surely the taxpayer is entitled in pleadings to know the basis of the assessment" (which, in a GAAR assessment, included the alleged Policy), and that the Minister's obligation in pleadings to provide "any other material fact" entailed an obligation to specify "the historical fact of what Policy the Crown actually relied upon" (para. 18).
Campbell J.'s order did not bind the Respondent as to what position it could take in the litigation as to the Policy (para. 24).
MacDonald v. The Queen, 2012 TCC 123, rev'd 2013 DTC 5091 [at 5982], 2013 FCA 110
The taxpayer planned to move to the U.S.. Although the capital gain on the shares of his wholly owned corporation ("PC") that would have arisen (under s. 128.1(4)(b)) on his emigration would have been sheltered for Canadian purposes by unutilized capital losses, there would have been no corresponding step up in the tax basis of his shares of PC for US tax purposes. In light of this issue, he sold his shares of PC (which held liquid assets) to his brother-in-law ("J.C.") in exchange for a promissory note, which was satisfied (within the following serveral months) with funds that J.C. extracted from PC (by first transferring his high-basis shares of PC to a "Newco" in consideration inter alia for a promissory note, which was repaid by Newco with funds which it, in turn, extracted from PC).
After finding that s. 84(2) did not apply to deem any portion of the sale proceeds to be a dividend, Hershfield J. found that s. 245(2) did not apply to produce the same result. The alleged abuse was that the capital gains, which enabled the use of the taxpayer's losses, arose from payments that, being funds from the taxpayer's own corporation, would normally be treated as dividend income. Hershfield J. stated (at para. 116):
Indeed, triggering capital gains to utilize capital losses is not discouraged by the Act in any way. Transfers to a corporation without a section 85 election can be used to realize capital gains as can transfers between spouses. There is nothing abusive about realizing capital gains for no other purpose than to utilize available net capital losses.
Furthermore, allowing capital gains treatment of the sale produced a "fair result" (para. 139), whereas "to deny a tax benefit to which he was entitled by an express provision of the Act [i.e., s. 128.1(4)(b)] because he achieved it by a different legally effectively means is, frankly, bizarre" (para. 121). Although the transactions entailed surplus stripping, "it is doubtful whether in an integrated corporate/shareholder tax system, a surplus strip per se can be said to abuse the spirit and object of the Act" (para. 101).
Antle v. The Queen, 2009 DTC 1305, 2009 TCC 465, aff'd 2010 DTC 5172 [at 7304], 2010 FCA 280
A plan for the taxpayer to avoid capital gains on his sale of shares of a corporation ("PM") would have entailed him gifting the shares to a Barbadian trust of which his wife was the sole beneficiary (so that the trust was intended to be a spousal trust), with the trust then selling the shares to his wife for a promissory note equal to the fair market value of the shares, and the trust distributing the promissory note to her on a wind-up of the trust and her selling the shares of PM to the purchaser. In finding that the transaction, if effective, would have given rise to an abuse for GAAR purposes, Campbell Miller, J. stated (at para. 119):
"Sleight of hand to inject a non-resident trust (not a legal entity but deemed an individual only for tax purposes) in the middle of a Canadian resident couple to take advantage of the tax treatment of a non-resident trust's own jurisdiction is intended to defeat Canada's policy of taxing residents on their capital gains."
Garron v. The Queen, 2009 DTC 1568, 2009 TCC 450, aff'd sub nom St. Michael Trust Corp. v. The Queen, 2010 DTC 5189 [at 7361], 2010 FCA 309, aff'd sub nom Fundy Settlement v. Canada, 2012 SCC 14
Woods, J. rejected a submission of the Crown that it would have represented an abuse of the Canada-Barbados Income Tax Convention to use the gains exemption in Article XIV(4) to avoid an anti-avoidance rule such as s. 94 of the Act (after noting that in the OECD Commentary, the OECD indicated that contracting states may need to explicitly provide in income tax conventions for the preservation of the right to apply domestic anti-avoidance provisions).
She also rejected a submission that it represented an abuse of that Convention to rely on such treaty exemption where the trust in question had very little connection with Barbados. She noted (at para. 381) that such an approach would result in a selective application of the Treaty to residents of Barbados, on the basis of criteria other than residence, and that the object and spirit of the Treaty was that residents of Barbados qualified for exemption.
OGT Holdings Ltd. v. Deputy Minister of Revenue (Québec), 2009 DTC 5705, 2009 QCCA 191
The taxpayers engaged in a "Québec shuffle" transaction in which they transferred shares of subsidiaries to a related Ontario purchaser on a rollover basis for Québec purposes but on a non-rollover basis for federal purposes (so that for Ontario corporate purposes the Ontario purchaser had full basis in the acquired subsidiaries) with the Ontario purchaser then selling the shares without any Ontario corporate tax being payable. In finding that these transactions represented abusive tax avoidance under s. 1079.10 of the Québec Taxation Act, the Court noted that the purpose of the Québec rollover provision (s.518) was to defer the realization of a capital gain, and not to be used in a scheme to avoid the payment of any Québec income tax on the gain.
Landrus v. The Queen, 2008 DTC 3583, 2008 TCC 274, aff'd supra.
A partnership of which the taxpayer was a member ("Roseland II") and another partnership ("Roseland I") owning a similar and adjacent condominium development, sold all their assets to a newly-formed partnership ("RPM") with the purchase price being paid for by way of set-off against the subscription price for the partnership interests in RPM with such partnership interest in RPM having been distributed to the partners of Roseland I and II.
After finding that these transactions were undertaken primarily to realize a tax benefit (the realization of terminal losses), Paris J. went on to find that the transactions did not result in an abuse or misuse and rejected a submission of the Crown (at para. 122) that "there is a general or overall policy in the Act prohibiting losses on any transfer between related parties, or parties described by counsel as forming an economic unit". Paris J. stated (at para. 120):
"In my view, the particularity with which Parliament has specified the relationship that must exist between the transferor and transferee for the purpose of each stop-loss rule referred to by the Respondent is more indicative that these rules are exceptions to a general policy of allowing losses on all dispositions."
He went on to state (at para. 123):
"I would also point out that Parliament has chosen to define the circumstances in which the terminal loss would be denied on transfers of depreciable property between partnerships in subsection 85(5.1) (now subsection 13(21.2)) and in doing so would appear to have chosen to allow taxpayers who are not within the circumstances set out in that provision to claim their terminal losses."
McMullen v. The Queen, 2007 DTC 286, 2007 TCC 16
The taxpayer and an unrelated individual ("DeBruyn") accomplished a split-up of the business of a corporation ("DEL") of which they were equal common shareholders by transactions under which (i) DeBruyn converted his (Class A) common shares into Class B common shares, (ii) the taxpayer sold his Class A common shares of DEL to a newly-incorporated holding company for DeBruyn's wife ("114") for a purchase price of $150,000, (iii) DEL issued a promissory note to 114 in satisfaction of a $150,000 dividend declared by it on the Class A shares, (iv) 114 as signed the promissory note to the taxpayer in satisfaction of the purchase price for the Class A shares, (v) the taxpayer transferred the promissory note owing to him by DEL to a holding company ("HHCI"), and HHCI purchased assets of the Kingston branch of the business of DEL in consideration for satisfaction of the promissory note.
After finding that none of the transactions was an avoidance transaction, Lamarre J. went on to indicate (at p. 298) that the Crown had not established "that the policy of the Act read as a whole is designed so as to necessarily tax corporate distributions as dividends in the hands of shareholders".
Ogt Holdings Ltd. v. Deputy Minister of Revenue of Québec, 2006 DTC 6604 (Court of Québec)
The taxpayers accomplished an indirect sale of their indirect investment in an operating company ("Canstar") to an arm's length purchaser ("Nike") by transferring their shares of holding companies for Canstar to a newly-incorporated Ontario corporation on a rollover basis for Québec purposes but not for federal purposes, followed by a sale of their shares of the Ontario corporation to Nike.
In determining that this transaction was abusive for purposes of the Québec anti-avoidance rule, De Michele J.C.Q. found that the purpose of the Québec rollover provision was to allow the deferral of capital gains tax, not its complete avoidance.
Ceco Operations Ltd v. The Queen, 2006 DTC 3006, 2006 TCC 256
The taxpayer transferred assets of a business to a partnership in what was intended to be an s. 97(2) rollover transactions in consideration for cash, promissory notes and assumption of debt ("boot") totalling an amount less than the cost amount of the transferred assets, and a Class "F" partnership interest stipulated to have a value equal to the balance of the purchase price. The partnership used cash (derived in part from a third party who had subscribed for ¾ of the equity in the partnership) to subscribe for preferred shares of a sister company of the taxpayer ("Holdings"), with Holdings in turn using the proceeds to subscribe for preferred shares of holding companies ("Holdcos") for the various indirect individual shareholders of the taxpayer. A "back-flow preventor" clause in the Partnership Agreement provided that in the event that the partnership received any payments in respect of preferred securities held by the partnership, the partnership would make distributions to the holders of Class F units equalling such payments received.
After noting (at p. 3015) that "in the real world" the Class F partnership unit "represented nothing more than an undertaking to pay $18.7 million for Holdings preference shares, which were of no practical value to the Partnership by reason of the Partnership Agreement", Bonner J. went on to find that the transactions were abusive in that in substance it could be said that the supposed "tax deferred proceeds" for the sale (represented by the Class F units) had reached the Holdcos. The Minister had been substantially correct in reassessing the taxpayer on the basis that it had received additional boot of $18.6 million.
Lipson v. The Queen, 2006 DTC 2687, 2006 TCC 148, aff'd supra.
The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal to fund the purchase of shares of a family company from the taxpayer for $562,500. A day later, the taxpayer and Jordanna borrowed, on a joint and several basis, $562,000 from the Bank secured by a mortgage on a new personal residence that they had just purchased, with the proceeds of that loan being used to pay off the loan the Bank had made to Jordanna. The taxpayer used the share sale proceeds to pay the vendor of the residence. The taxpayer filed his return on the basis that the inter-spousal rollover applied to the share sale and that s. 74.1(1) attributed to him the loss sustained by Jordanna resulting from the deduction of the interest expense on the mortgage loan from the dividend income she received on her purchased shares.
Bowman C.J. indicated (at p. 2692) that "paragraph 20.(1)(c) was intended to permit interest on money borrowed for commercial purposes to be deducted" and "that interest on money borrowed for personal use (such as buying a residence) is not deducible" and (at p. 2691) that "subsection 20(3) allows a deduction for interest on money borrowed to repay money previously borrowed for commercial purposes." Here, subsection 20(3) was being abused through "the purported attachment to the subsequent mortgage loan [of] the tax incidents of Jordanna's original and fleeting use of the proceeds of the first loan" (p. 2692).
Desmarais v. The Queen, 2006 DTC 2376, 2006 TCC 44
The taxpayer, who held 14.28% of the common shares of a Canadian private corporation ("Consercom") transferred a 9.76% block to a wholly-owned holding company ("6311") in consideration for preferred shares of 6311 with a high paid-up capital (thereby giving rise to a capital gain eligible for the capital gains exemption). The taxpayer also transferred shares of a Canadian private corporation ("Gestion") that he owned together with his brother to 6311 in consideration for shares of 6311. The redemption of the taxpayer's preferred shares of 6311 was financed through dividends received by 6311 from Gestion.
After finding that s. 84.1 was intended to prevent the stripping of surpluses of an operating company, that although Parliament had assumed that a shareholder with less than a 10% block of shares would not be able to strip the surpluses of that company, such influence could be exercised when two related shareholders held all the shares of a company (Gestion), and that there would not have been an abusive transaction if the taxpayer had transferred to 6311 only the Consercom shares, Archambault J. found that there was an abuse here where 6311 used the surpluses from Gestion to redeem the preferred shares that had been issued in consideration for the Consercom shares.
The tax consequences to the taxpayer were to be determined on the basis that the sums received by him on such preferred shares in excess of their paid-up capital were a dividend to him.
Evans v. The Queen, 2005 DTC 1762, 2005 TCC 684
A corporation ("117679") owned by the taxpayer issued a stock dividend of non-voting shares to the taxpayer that were redeemable and retractable for an aggregate of $487,000. The next day, the taxpayer sold these shares to a partnership of which his wife was a general partner and three of his children held a 99% limited partnership interest in consideration for a $487,000 promissory note of the partnership bearing interest at the rate prescribed for purposes of s. 74.5. The taxpayer utilized the enhanced capital gains deduction in respect of his gain on the sale. Thereafter, dividends and proceeds of redemption of the redeemable shares of 117679 were paid by way of set-off against payments of principal and interest on the promissory note. The Minister recharacterized under s. 245 everything that the taxpayer received from the partnership as dividends.
In reversing the s. 245 reassessment of the taxpayer, Bowman C.J. indicated that he could not find that there was "some overarching principle of Canadian tax law that requires that corporate distributions to shareholders must be taxed as dividends, and where they are not the Minister is permitted to ignore half a dozen specific sections of the Act" and also noted that the transactions did not lack economic substance in that there was "a genuine change in legal and economic relations that took place as a result of the transactions".
XCo Investments Ltd. v. The Queen, 2005 DTC 1731, 2005 TCC 655
A partnership owned by the taxpayers admitted a third party ("Woodward") as a member of the partnership with a view to selling an apartment building of the partnership and allocating 80% of the resulting gain for tax purposes to Woodward, with Woodward also receiving 80% of the net proceeds of sale of the property (which were substantially reduced due to the leveraging of the property) and then ceasing to be a partner.
The allocation of 80% of the income to Woodward was found to be unreasonable given that "Woodwards' contribution was both ephemeral and for all practical purposes risk free". The reasonable treatment of the arrangement under s. 103 would be to treat Woodward's share of the income as the amount of income it actually received.
However, Bowman C.J. went on to find that if he had concluded that s. 103(1) did not apply, on balance s. 245 would be applied to reach the same conclusion, but with the possibility that perhaps all of the profit, rather than most of the profit, should have been allocated to the taxpayers.
The Queen v. Jabin Investments Ltd., 2003 DTC 5027, 2002 FCA 520
In order to avoid the application of the pre-1994 version of section 80, debt owing by the taxpayer was sold by a bank (for consideration equal to 2.2% of the total amount owing) to a corporation ("W720") that had similar ownership to the taxpayer.
In finding that the avoidance of the application of section 80 by this transaction did not represent a "misuse". Rothstein J.A. stated (at p. 5028) that:
"If a provision of the Income Tax Act is not used cannot be misused",
and also found that there was no "abuse" stating (at pp. 5028-5029) that:
"We are not satisfied from the references given to us that there is a clear and unambiguous policy that debts that are not legally extinguished are to be treated as if they were."
Loyens v. The Queen, 2003 DTC 355, 2003 TCC 214
In order that the sale of a real estate property could be accomplished in a manner that utilized the losses of a loss company ("Lobro Stables") the taxpayers transferred the property to a partnership utilizing the rollover in subsection 97(2), transferred their partnership interests to Lobro Stables utilizing the rollover provision of subsection 85(1), with Lobro Stables then selling the property at a gain.
In finding that these transactions did not result in an abuse or misuse for purposes of s. 245(4), Campbell T.C.J. stated that the principles in OSFC Holdings with respect to loss trading should not be extended to profit trading, and the transactions simply utilized the provisions of the Act for the very purpose for which they were designed.
Hill v. The Queen, 2002 DTC 1749, Docket: 2000-3636-IT-G (TCC)
Under a non-recourse loan owing by the taxpayer and other tenants of an office building to the non-resident landlord, 90% of the cash flow was applied first to the payment of interest and then designated and paid as rent. If the interest expense (which had been reduced to a 10% rate in the taxation years in question) exceeded the cash flow, the taxpayer could request in writing that the landlord advance the excess to him as an addition to principal, with such excess interest also being added to the principal if no such request was made. By the taxation years in question, the principal had accumulated to well over twice the value of the property.
After finding that the excess interest was deductible in full notwithstanding that a portion of it accrued on amounts that had been reinvested by the landlord as stipulated in the loan, Miller T.C.J. declined to find that this result represented in an abuse or misuse in the absence of being referred to any material that would assist him in understanding why the government permitted the deduction of simple interest on a payable basis and only permitted the deduction of compound interest on a paid basis. He stated (p. 1763):
"What is the policy? It is not my role to speculate; it is the Respondent's role to explain to me the clear and unambiguous policy. He has not done so."
Fredette v. The Queen, 2001 DTC 621, Docket: 98-1340-IT-G (TCC)
A partnership ("SDF") of which the taxpayer and two trusts for his children were the partners owned substantially all the units in a second partnership ("SA") which, in turn, owned rental properties. SDF and SA had February 28 and January 31 fiscal periods with the result that net rental income of SA was not included in the income of the taxpayer for approximately two years. Archambault T.C.J. found that although the Act permitted income to be carried over for one year, the provisions of the Act, read as a whole, were contravened if a second, third or fourth partnership was interposed to defer the taxation of income for two, three or four years. Parliament's intent in enacting ss.96(1)(b), 248(1) and 249(2) was not to enable a taxpayer to defer the taxation of its income indefinitely. Accordingly, the fiscal period of SDF was to be treated as if it ended on February 28.
Given that s. 245(4) did not say "the Act and Regulations read as a whole", it was not appropriate for the Minister to assess on the basis that there was an abuse of the rental property restriction rules contained in Regulation 1100(11) for the taxpayer to finance his investment at a personal level and deduct interest personally without restriction. Furthermore, even if Regulation 1100(11) could be considered in determined whether there was an abuse, there was none given that it is quite common for a shareholder (or partner) to borrow in order to provide capital, and given that s. 245 cannot be used by the Minister as a tool to force taxpayers to structure a transaction in a manner most favourable to the tax authorities.
Geransky v. The Queen, 2001 DTC 243, Docket: 98-2383-IT-G (TCC)
The taxpayer, who owned a portion of the shares of the holding company ("GH") which, in turn, owned an operating company ("GBC") utilized the enhanced capital gains exemption in connection with the sale of a cement plant operated by GBC through the following transactions: the taxpayer and the other shareholders of GH transferred a portion of their shares of GH to a newly-incorporated company ("Newco") in consideration for shares of Newco having a value of $500,000; GBC paid a dividend-in-kind of most of the cement plant assets (having a value of $1 million) to GH; GH redeemed the common shares held in its capital by Newco by transferring to Newco the assets it had received from GBC; and the shareholders of Newco's sold their interests in Newco to the purchaser (who also purchased the remaining cement-plant assets directly from GBC).
Bowman T.C.J. found (at p. 250) that even if the transactions had been avoidance transactions, there would have been no abuse or misuse for purposes of s. 254(4):
"Simply put, using the specific provisions of the Income Tax Act in the course of a commercial transaction, and applying them in accordance with their terms is not a misuse or an abuse. The Income Tax Act is a statute that is remarkable for its specificity and replete with anti-avoidance provisions designed to counteract specific perceived abuses. Where a taxpayer applies those provisions and manages to avoid the pitfalls, the Minister cannot say 'Because you have avoided the shoals and traps of the Act and have not carried out your commercial transaction in a manner that maximizes your tax, I will use GAAR to fill in any gaps not covered by the multitude of specific anti-avoidance provisions'."
Jabs Construction Ltd. v. The Queen, 99 DTC 729
After it was determined as a result of settlement of litigation between the taxpayer and a co-venturer that it would sell its 50% interest in 13 properties to the co-venturer, the taxpayer gifted the 13 properties to a private foundation that had been funded and was controlled by its controlling shareholder, with the foundation then selling the properties to the co-venturer. Although the taxpayer avoided capital gains under s. 110.1(3), it realized recapture of depreciation and as part of the same transactions, received a loan from the private foundation sufficient to more than cover the tax realized by it.
In concluding that there was no abuse or misuse, Bowman TCJ. found that the taxpayer had used s. 110.1(3) "for the very purpose for which it was designed", namely, allowing "the tax consequences of a charitable gift to be mitigated", and further noted that section 245 was "an extreme sanction" which "should not be used routinely every time the Minister gets upset just because a taxpayer structures a transaction in a tax-effective way".
The Queen v. Central Supply Co. (1972) Ltd., 97 DTC 5295 (FCA)
The taxpayer acquired units in limited partnerships that had incurred Canadian exploration expense and then, within 24 hours and after the occurrence of the partnership year ends, resold their units for nominal consideration pursuant to "put" agreements.
Before going on to find that former s. 245(1) of the Act denied the deduction by the taxpayers of the Canadian exploration expense allocated to them by the limited partnerships, Linden J.A. found that such deductions by the taxpayers would have fallen outside the intended object and spirit of the resource provisions of the Act because the goals of the resource provision (the encouragement of exploration) were not furthered as a result of the taxpayer's fleeting investment in the partnerships at a time when no exploration or money was being carried out or contemplated.
Gibson Petroleum Co. Ltd. v. The Queen, 97 DTC 1420 (TCC)
The taxpayer which owned one-half of the shares of a company ("Wascana") having non-capital losses that were about to expire, transferred depreciable property to Wascana on a rollover basis and then, a few days later, purchased the depreciable property back at the same price but on a non-rollover basis. The other unrelated shareholder of Wascana engaged in similar transactions.
In finding that the deduction by the taxpayer of capital cost allowance on the stepped-up tax basis of the property did not give rise to an undue or artificial reduction of income for purposes of former s. 245(1), Teskey TCJ. stated that he did not believe that these transactions offended the object and spirit of the Act.
RMM Canadian Enterprises Inc. v. The Queen, 97 DTC 302, [1998] 1 C.T.C. 2300 (TCC)
A non-resident corporation ("EC") approached a business associate who, along with two other individuals, formed a Canadian corporation ("RMM") to buy the shares of a Canadian subsidiary ("EL") of EC for a cash purchase price approximating the cash and near cash on hand of EL and a Canadian subsidiary of EL ("ECL"). Immediately following the purchase, EL was wound-up into RMM and ECL was amalgamated with RMM; and three or four days later, RMM used the cash received by it from EL and ECL to pay off a loan that had financed the acquisition.
In finding that if this transaction had not already been caught by s. 84(2), s. 245 would deem the appropriate portion of the sale proceeds to be a dividend, Bowman TCJ. stated:
"The Income Tax Act, read as a whole, envisages that a distribution of corporate surplus to shareholders is to be taxed as a payment of dividends. A form of transaction that is otherwise devoid of any commercial objective, and that has as its real purpose the extraction of corporate surplus and the avoidance of the ordinary consequences of such a distribution is an abuse of the Act as a whole."
He also found that the Canada-U.S. Income Tax Convention could not prevent Canada from applying GAAR to recharacterize the transaction as one to which section 84 applied.
McNichol et al. v. The Queen, 97 DTC 111 (TCC)
The taxpayers sold their shares of a corporation ("Bec"), whose assets (following a sale of real estate) consisted largely of cash, to a corporate purchaser for a cash purchase price that reflected, in part, the savings that would accrue to the taxpayers from effectively receiving that cash as an exempt capital gain rather than as a liquidation dividend from Bec. Following the acquisition, the purchaser amalgamated with Bec and used the cash received on the amalgamation to pay off a bank loan that had funded the acquisition.
In finding that the taxpayers were correctly reassessed under s. 245(5) to treat the purchase price received by them as a taxable dividend from Bec, Bonner TCJ. stated (at p. 121):
"The transaction in issue which was designed to effect, in everything but form, a distribution of Bec's surplus results in a misuse of sections 38 and 110.6 and an abuse of the provisions of the Act, read as a whole, which contemplate that distributions of corporate property to shareholders are to be treated as income in the hands of the shareholders. It is evident ... that the section [245] is intended inter alia to counteract transactions which do violence to the Act by taking advantage of a divergence between the effect of the transaction, viewed realistically, and what, having regard only to the legal form appears to be the effect."
Administrative Policy
28 May 2015 IFA Roundtable Q. 2, 2015-0581551C6
What is CRA's position on the application of the GAAR to treaty shopping arrangements? CRA stated:
The…comments on treaty shopping… made in the February 2014 Budget as well as in the August 2014 Finance news release [do not] preclude[e] the application of the GAAR to treaty shopping arrangements.
The CRA continues to contemplate the application of the GAAR to transactions undertaken primarily to secure a tax benefit afforded by a tax treaty and, in fact, the GAAR Committee has recently approved the application of the GAAR to certain treaty shopping arrangements.
GST/HST Memorandum 16-4 "Anti-avoidance Rules" 20 February 2015
3. ...Transactions that rely upon the strict wording of a provision in the Act to gain a tax benefit where none was intended and, therefore, defeat the purpose of the provision, would be a misuse or abuse of the legislation.
4. The anti-avoidance rules will override other provisions of the Act in order to maintain the spirit and intent of the legislation.
10 October 2014 APFF Roundtable Q. 21, 2014-0538091C6 F
What is the CRA position on Descarries? After noting that the case was not appealed because in the result it was favourable and it was only an informal procedure case, CRA then summarized the facts, stating that the Oka shareholders engaged in "three avoidance transactions" (TaxInterpretations translation) for appropriating the surplus of Oka which, in December 2004, had already "liquidated around 93% of its business assets with the rest…also in the course of liquidation:"
First, on 1 March 2005, they effected an internal transfer ["roulement interne"] of their shares in the capital of Oka in order to crystallize in the adjusted cost base ("ACB") of new shares [of Oka], the excess of the fair market value ("FMV") of the transferred shares over their ACB, thereby realizing a capital gain… .
The second transaction, effected on 15 March 2005, consisted in rolling those new shares in the capital of Oka to…Quebec Inc….in exchange for shares of two classes in the capital of Quebec Inc.: the first…having a low PUC and an ACB equal to their FMV (the "1971 FMV Shares") and the second class having a high PUC (which was the objective of the second transaction) and a high ACB equal to their FMV (the "Stripping Shares").
The third transaction consisted of redeeming for cash on 29 March 2005 all of the Stripping Shares, and part of the 1971 FMV Shares, so as to generate a capital loss sufficient to expunge the capital gain generated in the first transaction.
The CRA continues of the view that ITA subsection 84(2) should have applied in this case especially by reason of …MacDonald… . Furthermore, the CRA is concerned by the approach adopted by the TCC respecting the analysis of the avoidance transactions for purposes of the application of ITA subsection 245(2).
After describing how the decision failed to recognize the broad scope of s. 84(2), CRA discussed its concerns respecting the GAAR analysis:
The Tax Court in its analysis of abuse of the provisions of the ITA as a whole for purposes of determining whether the avoidance transactions were abusive in this case, had limited its analysis to two provisions: subsection 84(2) and section 84.1…as being the sole anti-avoidance provisions applicable to surplus stripping,
…One should also…take into account…[ss. 82(1)(b). 121, 84(1) to (4) and 15(1)] which support a tax policy whose purpose is to tax exclusively in the form of dividends direct payments of corporate surplus to shareholders… . These provisions reflect…a clear and unambiguous tax policy…called the integration rules, which also is supported by a wide range of provisions (among others, section 84.1 as well as subsections 84(2), 246(1) and 245(2), taking into account former subsection 247(1) and particularly the related explanatory notes of the Department of Finance) whose purpose is to prevent individual shareholders from indirectly accessing the surplus of a corporation otherwise than as a dividend. In short, in a situation such as in the Descarries case, the three avoidance transactions are…an abuse of the integration system. …
We also are concerned by the precision of the principle proposed by the TCC to the effect that in carrying out the three avoidance operations, subsection 84.1(1) could be utilized to distribute surplus of a corporation in the form of a capital gain to the extent that that the capital gain is not reduced y a capital loss which is sustained from the disposition of shares whose ACB is derived from the FMV of those shares on V-Day… . [This ] analysis…effectively modifies the nature of the "tax benefit," which consisted in a reduction of tax resulting from a transformation of part of a deemed dividend under subsection 84(2) into a capital gain. …
CRA will seek a decision of the Federal Court of Appeal or the Supreme Court of Canada…confirming the broad scope of subsection 84(2) recently established….in…MacDonald…and on whether or not there is a specific scheme under the Act for taxing any direct distribution of surplus of a Canadian corporation as a taxable dividend in the hands of individual shareholders; as well as a specific scheme under the Act against indirect surplus stripping.
See also summary under s. 84(2).
2 December 2014 CTF Roundtable, Q. 6
Does the formation of a partnership with only Canadian partners in order to meet the requirement of a "Canadian partnership" under subsection 97(2) followed by the admission of a non-resident as a partner soon after (e.g. the next day) jeopardize the rollover?
CRA indicated that the issues in a denied ruling request, entailing the transfer of a non-Canadian business into a partnership which a non-resident became a member, could be illustrated as follows: Corp A is a taxable Canadian corporation, which transfers the business, represented by depreciable property with a capital cost and FMV of $100,000 and a UCC of $50,000, on a s. 97(2) rollover basis to a newly-formed partnership between it and its wholly-owned Canadian subsidiary (holding 1 of the 100 initial units) in consideration for a $50,000 promissory note and 50,000 units. The next day, the non-resident becomes a partner by contributing $50,000 for 50,000 partnership units (49.95%), thereby diluting Corp A's interest to 50.04%, with the promissory note then being repaid. CRA stated:
As part of the series of transactions, there is a dilution on a percentage basis in favour of a non-resident but without any Canadian tax recognition of the latent income gain. The new anti-avoidance rules under subsections 100(1.4) and (1.5) do not yield taxation to Corp A on the admission of the non-resident as a partner because there is no dilution of its partnership interest on a fair market value basis (i.e. the FMV of Corp A's partnership interest is still $50,099). If instead there had been a direct disposition by Corp A to the non-resident of part (49.95%) of its partnership interest, amended subsection 100(1) would have resulted in a fully taxable gain to Corp A of $24,975, which amount is also equivalent to 49.95% of the latent recapture in the depreciable property of $50,000.
The CRA will challenge such an arrangement by applying the GAAR. In our view, the determination of a misuse or abuse of the Act must be made having regard to the 2012 amendments to subsection 100(1) that extend its application to acquisitions by non-residents and the addition of the anti-avoidance dilution provisions contained in new subsections 100(1.4) and (1.5).
See 2014 CTF Conference
.
10 October 2014 APFF Roundtable Q. , 2014-0534671C6 F
What is the CRA position on D & D Livestock? CRA stated (TaxInterpretations translation):
[S]ubsection 245(2) was not applied in this case. However, the CRA would not hesitate to invoke the GAAR in similar files. … The CRA considers among other things that transactions or series of transactions permitting the double utilization of the same amount of safe income in order to reduce a capital gain realized on an ultimate disposition of shares of a corporation are abusive and go against the object of subsection 55(2). Moreover, Justice Graham emphasized at paragraphs 27 and 28 of the decision… that the transactions in the case resulted in stripping of capital gains.
Furthermore, the CRA is also concerned by planning which can result in an unjustified duplication of fiscal attributes, for example, the duplication of the adjusted cost base of a share, regardless of the fact the that adjusted cost base exists by reason of safe income of a corporation. Similar transaction will be contested by the CRA, as appropriate.
2013 Ruling 2013-0504301R3 - Loss Consolidation
A public company (Lossco) is transferring losses to a "Profitco" which is a wholly-owned indirect subsidiary of another public company (Bco) which is partially owned by Lossco. See summary under s. 111(1)(a). See summary under s. 111(1)(a).
In addition to customary federal rulings including GAAR, CRA ruled:
The general anti-avoidance provision of a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such a tax collection agreement is in effect.
24 November 2013 CTF Roundtable Q. , 2013-0508161C6
A shareholder having an accrued foreign exchange loss on common shares of an FA and an accrued foreign exchange gain on a related party debt used to acquire those shares acquires a separate class of the FA's shares and pays dividends thereon with a view to such dividends not reducing a loss to be realized on the a sale of the original FA shares owned - in order that such loss can offset the FX gain on settlement of the debt. Would the conclusion at the 2013 IFA conference (see below) that GAAR would apply change if the funds used to acquire the original FA shares had been borrowed from an arm's length party more than 30 days before the acquisition of the shares?
In responding "no," CRA indicated that a loss would be denied "unless the related debt is a debt described in subparagraph 93(2.01)(b)(ii), a provision which precisely specifies which gains are intended to have an effect on the computation of the amount of a loss to be denied on the disposition of FA shares," and that one such requirement was that an "arm's length foreign currency debt… was entered into within 30 days of the acquisition of the FA share."
5 October 2012 APFF Roundtable Q. , 2012-0454181C6 F
Mr. X holds 100 Class voting participating shares of Opco with a fair market value of $5M and nominal adjusted cost base and paid-up capital. He incorporates Holdco whose shares have nominal fair market value, adjusted cost base and paid-up capital and exchanges his Class A shares of Opco for preferred shares of Opco with the same FMV, ACB and PUC as the exchanged Class A shares. Opco isssues Mr. X 100 Class A shares for nominal consideration and also issues 100 discretionary dividend shares to Holdco. In order to limit the net asset value of Opco to $5M (i.e., for creditor-proofing purposes), Opco annually pays dividends of $500K on the discretionary shares held by Holdco.
After noting that these transactions could result in the application of s. 15(1) or s. 110.6(7), CRA also stated that s. 245(2) could apply and noted (TaxInterpretations translation) that the Directorate:
would take into account, among others, paragraph 85(1)(e.2) ITA which does not permit a taxpayer to accord a benefit upon a corporation unless it is a wholly-owned subsidiary of the taxpayer.
5 October 2012 APFF Roundtable Q. , 2012-0454161C6 F
Where Mr. A, who owns 50% of the shares of a CCPC ("Gesco") having cash as its only asset, purchases the other 50% shareholding of Mr. B, s. 245(2) potentially may apply (Tax Interpretations Translation):
...we are of the opinion that the acquisition of shares of a corporation whose sole asset is cash as in the given situation could occur as part of a surplus stipping scheme having regard to which subsection 245(2) I.T.A. could be invoked.
3 July 2012 T.I. 2012-0443421E5 F
A and B are Canadian-resident spouses who have not utilized their capital gains exemption and who each hold 50 Class A shares (the only issued and outstanding shares) of their family farm corporation ("Milkco," a CCPC which has carried on a dairy farm for 20 years) having an fair market value of $500,000 an adjusted cost base and paid-up capital of $50, and qualifying under s. 110.6(1) as shares of the capital stock of a family farm corporation. They also each hold a 1/2 "interest in a family farm partnership" as defined in s. 110.6(1), namely, Grainco s.e.n.c., which has operated a cereal growing farm for three years, with each such 1/2 interest having an acb of $50.
A and B each roll their shares of Milkco into Grainco s.e.n.c. for additional partnership interests in Grainco s.e.n.c.
Five years later, after the fmv of the interests in Grainco s.e.n.c. have appreciated to $1.5 million and such interests continue to qualify as interests in a family farm partnership, A and then B 9several days later) transfers his or her partnership interest in Grainco s.e.n.c. to a newly-incorporated corporation ("Managementco") - in which each of A and B holds common shares with an acb of $50) in consideration for a note receivable of $750,000 and claims the capital gains exemption. As Grainco s.e.n.c. now only has one partner (Managementco), it is dissolved by operation of law (with a view to the aplication of s. 98(5).)
Provided that Grainco s.e.n.c. has legal existence and does not hold title to the shares of Milkco as mandatary or nominee, s. 84.1 does not apply.
A stratagem permitting a taxpayer to strip the surplus of a private company by means of a reorganization which results in an indirect holding of its shares by means of a partnership appears to avoid the application of section 84.1.
The concept of series of transactions is enlarged by s. 248(10) - see Canada Trustco and Copthorne.)
[I]n order to determine if there is an abuse having regard to section 84.1, the CRA would need in particular to consider the source of funds used to pay off the consideration for the disposition of the partnership interests, as well as the value attributable to the shares of the corporation [i.e., Milkco] held by the partnership relative to the total value of the interests in the partnership....The CRA is preoccupied by transactions which could result in a stripping of corporate surplus. Furthermore, the CRA has concluded in certain cases (for example where a partnership serves only to hold shares of a private company), that this type of reorganization engages the application of the general anti-avoidance rule.
In response to a question as to whether the answer would change if Managementco instead was owned by the child of A and B, CRA indicated that although it was aware of the intergenerational rollover in s. 70(9.21), s. 84.1 did not take this consideration into account, so that the answer would not change.
2011 Ruling 2011-0392171R3 -
A deposit-taking financial institution with significant non-capital losses (LossCo") was directed by the provincial regulator to quickly merge with a financially stronger institution. Accordingly, ProfitCo acquired all the LossCo shares of LossCo Shareholder (which included preferred shares), and ProfitCo and LossCo then amalgamated to form AmalCo, with each LossCo and ProfitCo shareholder receiving shares of AmalCo which were substantially similar to the shares in the capital of ProfitCo.
In order to avoid the application of the debt forgiveness rules to the extinguishing of redeemable subordinated debentures owed to another corporation in the same corporate group as LossCo Shareholder ("LossCo Lender"), the following additional transactions occurred: prior to the acquisition of LossCo, ProfitCo lent money to the LossCo Shareholder; LossCo Shareholder used that advance together with some of its own funds to subscribe for Class A participating shares of LossCo; LossCo paid off the subordinated debentures (also referred to as "subordinated debt") owing to LossCo Lender; and the advance owing by LossCo Shareholder to ProfitCo was then repaid by way of set-off against the sale price payable to LossCo Shareholder for its shares of LossCo.
After giving favourable s. 111(5)(a) rulings, CRA ruled that s. 245(2) will apply on the basis "that the repayment of the subordinated debt...will be considered a settlement of the subordinated debt for no consideration for the purposes of applying section 80." In its summary, CRA noted that these "transactions are essentially the same as transactions that the GAAR committee previously determined resulted in an abuse of section 80."
28 November 2010 CTF Roundtable Q. 21, 2010-0386361C6
CRA stated that para. 1(j) of IT-189R2 ("Corporations Used by Practising Members of Professions") and para. 17 of IC 88-2 ("General Anti-Avoidance Rule) are both correct in context and are not contradictory.
(IT-189R2 provides that, in determining whether a corporation is carrying on a professional practice under s. 125, a relevant factor is whether the corporation pays the professional a reasonable salary in an employment relationship under a written agreement. IC 88-2 provides that it is not an abuse under s. 245(4) for a corporation, for tax reasons, to decline to pay a non-arm's-length employee so as to avoid generating losses.)
2010 Roundtable Q. , 2010-0373291C6 F
despite the decision in Vaillancourt-Trembly 2010 FCA 119, CRA will continue to challenge abusive surplus stripping arrangements, including those taking the form of "tuck under" transactions, given that there was a strong dissent in that case based on the Smythe case ([1970] S.C.R. 64) and given that s. 245(2) was not argued in that case.
2010 Ruling 2009-0332571R3
Mr A and Mrs B are siblings. Mr A holds all the voting shares of HA which, in turn, holds Lossco. HA also is the common shareholder of HASub. Mr. B and/or Mrs B indirectly control HBSub through a similar structure.
Lossco will make interest-bearing loans to HASub and HBSub, and HASub and HBSub will use the loan proceeds to subscribe for preferred shares of Lossco, thereby accomplishing a loss shift.
Standard rulings including GAAR. Summary states:
The transfer of losses between related, but not affiliated, corporations should not result "in an abuse having regard to [the provisions of the Act]...read as a whole", for the purposes of subsection 245(4), because specific provisions such as subsections 111(4) to (5.5), 256(7), 191.3(1), 112(2.4), paragraph 55(3.1)(c), section 80.04 etc. allow loss utilization transactions between related corporations, while only subsection 69(11) does not allow rollover where property is transferred to a person other than a person that is affiliated with the transferor.
2005 Ruling 2005-0123631R3
GAAR will apply to prevent what otherwise would be the avoidance of the thin capitalization rule when debts owing by a Canadian corporation to a non-resident affiliated corporation (Finco) are transferred by the Finco to a partnership organized by that Canadian subsidiary and a Canadian affiliate in consideration for the issuance of interest-bearing debt by the partnership to the Finco.
Income Tax Technical News, No. 34, 27 April 2006 under "Sale of Tax Losses"
Where Profitco avails itself of the benefit of tax losses of Lossco, a publicly traded corporation that is insolvent and has ceased to carry on its business, by transferring assets to Lossco in consideration for shares that represent only 45% of the votes but substantially all the value of Lossco, CRA would consider the application of GAAR.
2005 APFF Roundtable Q. 13, 2005-014106
S.245(2) generally would not apply where an individual ("X") owning 20% of the shares of Opco disposes of his shares of Opco to a newly-incorporated subsidiary of Opco for cash, provided that cash or near-cash does not constitute a significant portion of Opco assets, Opco continues to carry on its business, and Subco and Opco merge following this transaction.
2004 Ruling 2004-009475 -
GAAR did not apply where a Canadian securitization trust, in order to borrow at favourable rates provided by an arm's length foreign lender, entered into a back-to-back financing arrangement under which the lender lent to a newly-incorporated Alberta corporation owned by a trust with a charitable beneficiary, and that corporation lent, on similar terms, to the trust.
2004 Ruling 2004-008854 -
Loss utilization transactions in a related group of companies under which Profitco transfers its promissory note of a wholly-owned subsidiary of Profitco ("Subco") to a sister company with losses ("Lossco") in consideration for Class A preferred shares of Lossco, and Profitco then transfers the Class A preferred shares to Subco in exchange for Class AA preferred shares of Subco. Ruling that s. 245(2) will not apply.
2004 Ruling 2004-008431 -
On the transfer of the assets of a partnership to a corporation ("Newco") in consideration for shares and a promissory note, for reasons of legal simplification the shares and note are issued in the respective names of the partners (based on their pro-rata share) instead of the name of the partnership, with such pro-rata interest then being distributed to the respective partners on the subsequent wind-up of the partnership under s. 85(3). A comment that this manner of issuing the shares and promissory notes did not invalidate the application of ss.85(2) and (3).
2004 Ruling 2003-005398 -
A mutual fund trust (the "Fund") subscribes for Class A redeemable retractable shares of a newly-incorporated subsidiary ("MFC") and distributes the Class A shares to its unitholders as a return of capital with MFC then electing to be a public corporation, Fund transfers its common shares and notes of a subsidiary ("Holdco") which in turn holds limited partnership units in a partnership to MFC in consideration for redeemable retractable Class B shares of MFC, MFC and Holdco amalgamate, the amalgamated corporation ("Amalco MFC") merges into the Fund as described in s. 132 and the Fund transfers its partnership units to a subsidiary trust.
After noting that the taxable Canadian corporation (Holdco) that is converted to a mutual fund corporation ("MFC") is currently within a mutual fund family, so that the proposed transactions do not involve the type of conversion into an mutual fund corporation that has historically caused concern, the Directorate ruled that s. 245(2) would not apply.
Income Tax Technical News, No. 30, 21 May 2004
Under the scheme of the Act it is acceptable to transfer deductions within an affiliated group of corporations. The Agency will not feel comfortable providing a ruling on a loss consolidation transaction "that contemplates dollar amounts and time frames that are blatantly artificial". Respecting CRB Logging, the Agency has "provided rulings on some upstream shareholding situations. The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary".
2003 Ruling 2003-004182
The establishment by a pension corporation of a subsidiary pension corporation for the purpose of increasing the percentage of underlying foreign property that could be held on a consolidate basis would not offend the provisions of section 206 (or 259).
2003 APFF Roundtable Q. 1, 2003-0029955
General discussion as to whether s. 245(2) might be applied in the situation where shareholders of an operating corporation ("Opco") sell their shares of Opco, utilizing the enhanced capital gains exemption, after it transferred all its assets to a newly created subsidiary.
2 June 2003 T.I. 2003-000248 -
A farmer transfers farm property to an adult child at fair market value taking back a promissory note as consideration, then makes a gift to his child of enough funds to allow for repayment of the note. Such a transaction would appear to be undertaken primarily to avoid the consequences of section 80, which would otherwise apply on a straightforward forgiveness of the debt, and, accordingly, such transaction may be subject to s. 245(2).
31 March 2003 Memorandum 2002-016627
Where a trust issues debt and the only property held by the trust is foreign property, the Directorate indicated that although the technical provisions of the Act would be met:
"Taking into account the clear overall purpose of these rules to limit foreign property within registered plans and the additional detail contained in provisions such as paragraphs 206(1.1)(b) and (c) of the Act imposing a substantial Canadian presence test, it is the CCRA's view that it is appropriate to look at the underlying foreign property of a trust in determining whether the relevant tax policy has been abused. Accordingly, in situations involving debt of a trust, we have only ruled favourably where the facts and proposed transactions reflect that more than 50% of trust's assets will be invested in Canadian property."
9 September 2002 T.I. 2002-014100
Technical Interpretation No. 9518785 (respecting a parent subscribing for shares of a sub, which uses the funds to repay debt owing) is being withdrawn given that technical interpretation should not be provided in respect of GAAR.
2001 Ruling 2001-009021
Description of loss consolidation transactions under which a public corporation lends money on an interest-bearing basis to a profitable subsidiary ("Subco"), the profitable subsidiary subscribes for preference shares of a newly incorporated subsidiary of the parent ("Newco") and Newco lends money on an interest-free basis to the parent. If such transactions resulted in a non-capital loss to Subco, they would be considered to be abusive as they effectively would permit the refreshing of non-capital losses of the parent.
2000 Ruling 2000-001072
A corporation ("TC") previously transferred a property to another corporation ("DC") and received non-voting preferred shares of DC as consideration. In connection with a butterfly reorganization of DC, the addition of voting rights to such preferred shares in order that DC would be connected with TC for Part IV tax purposes would not result in the application of s. 245(2) given that DC would have been connected from the outset if the preferred shares originally issued had been voting.
May 1999 CALU Conference No. 9908430., Q.3
GAAR likely would apply where holding companies for individual shareholders own and pay premiums for insurance policies on the lives of the other shareholders, and the operating company is designated as the beneficiary (so that the addition to its capital dividend account for the amount of life insurance proceeds received is not reduced by the adjusted cost bases of the policies).
Income Tax Technical News, No. 9, 10 February 1997
As a result of an amendment to s. 69(11), "a series of transactions that results in the transfer of the benefit of the losses, deductions or other amounts from one corporation to a corporation with which it is not affiliated will generally be considered to result in an abuse ... ."
1997 Ruling 971700
In order to avoid averaging with the low ACB of shares currently held by them that are subject to an escrow agreement, employees of a public corporation transfer unexercised employee stock options to revocable trusts. Under the terms of each trust a registered charity is entitled in specified circumstances to receive a pecuniary bequest and the employee (and his estate) is otherwise the sole beneficiary, and the sole trustee. If the trust subsequently exercises the options, it borrows funds needed to pay the exercise price from the employee.
RC ruled that the trust and the employees will be separate and distinct taxpayers for the purposes of s. 47(1), and that s. 245(2) will not be applied to the tax consequences of the transactions.
1996 A.P.F.F. Round Table No. 7M12910 (Item 3.1)
As an example of a transaction where a taxpayer sought to avoid application of s. 84.1, RC referred to a taxpayer who implemented a reorganization under s. 86 with the aim of converting voting shares of the corporation involved in the transfer into non-voting shares to avoid the transferred corporation being related to the purchaser.
1996 A.P.F.F. Round Table No. 7M12910 (Item 3.1)
Where specific anti-avoidance provisions are not applicable to a transaction or series of transactions that results in tax abuse, the general anti-avoidance provision may be applied even before taking tax conventions into account." The ability in a country to apply general anti-avoidance provision in domestic tax law is recognized by the OECD, and the right to apply the GAAR is implicit in Article 29A, paragraph 7 of the Canada-U.S. Convention.
6 July 1995 T.I. 5-931646 -
In response to a proposal that a payment be made to a separated wife of a husband by her dissenting to the amalgamation of a corporation controlled by her husband and in which he had a minority interest with another corporation wholly-owned by her husband, RC stated that "where a payment to a shareholder pursuant to his/her right of dissent arises as a result of transactions the primary purpose of which is to realize a distribution of corporate surplus that is taxed as a capital gain rather than a dividend and the capital gains are taxed at a lower rate, it is our view that it would constitute an avoidance transaction and subsection 245(2) would be applicable unless it is not considered to result in an abuse ... . Transactions contrived to avoid the application of section 84.1 would be considered to result in an abuse for the purposes of subsection 245(4) of the Act".
21 June 1995 T.I. 951091 (see also 21 May 1996 T.I. 952686)
With respect to a loan by a wholly-owned foreign affiliate of a Canadian corporation ("Canco") to a non-resident corporation that was related to Canco but not a foreign affiliate of any person resident in Canada, RC indicated that "in the event the above transactions were part of a series of transactions that was designed to avoid the application of subsection 15(2) to monies acquired by a shareholder or a corporation connected to the shareholder of Canco, the series of transactions may be considered a misuse of subsection 15(8) of the Act and subsection 245(2) may apply".
12 April 1995 T.I. 950859 (C.T.O. "GAAR and Utilization of Losses")
S.245 will not apply in a situation where inventory is transferred by a corporation to a wholly-owned subsidiary for the purpose of utilizing the accumulated non-capital losses of the subsidiary.
1995 Ontario Tax Conference Round Table, Q. 5 (No. 952503)
Where $500,000 worth of common shares of Opco are sold by its individual shareholder to a corporate purchaser, following which the purchased shares are purchased for cancellation by Opco for $500,000 and the purchaser then purchases the remaining net assets of Opco from Opco, RC will consider that the economic substance of the transaction is that the purchaser is buying assets rather than shares, and that there is a series of transactions one of the effects of which is to affect a significant reduction in the assets of Opco in order to avoid tax that would have been payable on distribution of its property to the individual shareholder. Accordingly, GAAR will apply on the basis that former s. 247(1) would have applied to the transactions.
27 May 1994 T.I. 5-940894
GAAR potentially may apply where a taxpayer transfers to her spouse her interest in a partnership in which they are equal partners and receives a salary for her services in lieu.
1994 A.P.F.F. Round Table, Q. 34
Transactions, whereby an individual took advantage of the fact that he had preferred shares of a holding company with a fair market value and ACB (of $400,000) corresponding to the safe income and fair market value of shares of an operating company, in order to effect a disposition of the shares of Opco to a third-party purchaser on a tax-free basis, were considered to represent an abuse given that former s. 247(1) would have applied to such transactions and given that if the holding company had sold its shares of the operating company directly, the individual would have realized the proceeds of disposition by way of a taxable dividend.
Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")
S.245(2) will be applied where CCA claims effectively are doubled-up by having Partnership B acquire all but one of the interests in Partnership A on the day Partnership A's fiscal year ends (two days before Partnership B's fiscal year end), with the sole purpose of becoming, on the following day, the owner of a 99.9% undivided interest in the film once Partnership A is dissolved pursuant to s. 98(3).
Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")
RC will accept investors in film limited partnerships being accorded the right to put their units to an entity related to the film promoter provided that the principal purpose of the put arrangement is not to convert income to capital gains (as opposed to providing the investors with liquidity).
1993 A.P.F.F. Round Table, Q. 2
"In a situation where a non-resident of Canada carries out a series of transactions whose purpose is to secure an exemption from or reduction of Canadian tax through a tax convention that Canada has concluded with another country, the Department will examine this type of situation closely in order to establish whether it results in an abuse."
93 CPTJ - Q.14
Where a transaction is structured to avoid the application of a specific anti-avoidance rule, the general anti-avoidance rule may still be applicable if it may reasonably be considered that the transaction results in a misuse or abuse of the provisions of the Act.
26 January 1993 T.I. (Tax Window, No. 28, p. 1, ¶2383)
Whether s. 245(2) would apply where a profitable corporation provides services at less than fair market value to an affiliated company with losses would be a question of fact.
11 January 1993 T.I. (Tax Window, No. 27, p. 14, ¶2358)
A capital gain realized on a cash distribution of paid-up capital on preferred shares that constitute qualified small business corporation shares and that have a low adjusted cost base will be eligible for the enhanced exemption, without application of GAAR, even if the distributed funds are immediately loaned back to the corporation.
December 1992 B.C. Tax Executives Institute Round Table, Q. 1 (No. 9230390)
Where a corporation grants investors an option to acquire a debenture with terms identical to those of an existing callable debenture, RC will consider applying s. 245(2) given that the economic effect of the arrangement is to convert a capital receipt (proceeds of sale of the option) into an income deduction in respect of the interest payments.
16 December 1992 T.I. 920178 (November 1993 Access Letter, p. 511, ¶C245-050)
Discussion of whether s. 245 will apply where additional shares are required, or shareholdings are pooled, in order that Part IV tax will not apply to an intercorporate dividend.
1 December 1992 T.I. (Tax Window, No. 27, p. 9, ¶2319)
If one of the purposes of a series of transfers of a capital property within a related corporate group is to utilize non-capital losses of one of the corporations and if the vendor corporation has no intention of re-acquiring the particular assets, then GAAR will not apply.
92 C.R. - Q.24
Transactions whereby a stock dividend is issued to the sole shareholder of a corporation who transfers the stock dividend shares to Newco, followed by a redemption of the shares by Newco in order to "purify" the corporation for super-exemption purposes, should generally not be subject to the general anti-avoidance rule.
31 August 1992 Memorandum (Tax Window, No. 24, p. 3, ¶2191)
The use of s. 55(3)(b) to effect a transfer of assets deriving their value principally from real estate in the guise of a treaty-protected share sale was a misuse of the Act within the meaning of s. 245(4).
24 June 1991 T.I. (Tax Window, No. 4, p. 2, ¶1313)
GAAR does not apply to an arrangement whereby, in order to satisfy the 24-month hold period for the enhanced capital gains exemption, the vendor has his common shares changed under a s. 86 reorganization into preferred shares, and agrees to sell those preferred shares to the purchaser in 24-months' time.
2 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 11, ¶1083)
A butterfly reorganization involving the distribution of land inventory which is achieved on a rollover basis under ss.97(2) and 90(3) through the use of partnerships could entail an abuse through circumvention of the provisions of s. 85 which deny the benefits of the rollover to real estate inventory.
6 December 1990 T.I. (Tax Window, No. 2, p. 9, ¶1197)
RC could not give an opinion as to whether GAAR would apply to deny the current deduction of cost of distributing units of a mutual fund incurred by a taxable Canadian corporation which markets such units.
5 December 1990 Memorandum F-3973 (Tax Window, Prelim. No. 2, p. 17, ¶1063)
Transactions whereby a corporation with non-capital losses which are about to expire transfers its capital properties at a gain to a newly-incorporated subsidiary which it then winds-up, should fall within the stated lenient policy of RC respecting in-house loss transfers.
9 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 17, ¶1035)
GAAR will not apply to a transfer of farmland by an individual to his child pursuant to s. 73(3) following shortly thereafter by a sale by the child to an arm's length third party at a gain.
90 C.R. - Q22
The fact that an estate freeze has been accomplished in favour of a discretionary trust of which the freezor is a beneficiary would not generally result in the application of GAAR.
90 C.R. - Q20
Where, in order to "crystallize" his capital gains deduction, the individual sells shares to his spouse and does not elect to have the provisions of s. 73(1) apply, s. 245(2) will not apply, there being no indication in the Act that a capital gain must arise from an arm's length disposition in order to be eligible for the capital gains deduction.
90 C.R. - Q21
S.245(2) will apply where an individual owns the shares of a corporation ("Caschco") the assets of which are primarily liquid assets, sells the shares of Cashco to an arm's length purchaser, and claims a capital gains exemption, following which Cashco is wound up by the purchaser which uses the liquid assets to pay the purchase price to the individual.
14 June 1990 T.I. (November 1990 Access Letter, ¶1535)
The French word "abus" is broad enough to encompass both "misuse" and "abuse".
30 May 1990 T.I. (October 1990 Access Letter, ¶1487)
RC will consider applying s. 245(2) to an arrangement which has been set up primarily to change income received by one corporation from an inactive business into active business income.
9 May 1990 Meeting (October 1990 Access Letter, ¶1474)
S.245(2) will not normally be applied to transactions whose purpose is to qualify a corporation as a small business corporation.
20 April 1990 T.I. (September 1990 Access Letter, ¶1435)
An arrangement whereunder employees participating in an employee share purchase plan are permitted to realize capital gains treatment rather than deemed dividend treatment as a result of purchases by related corporations, would not generally be subject to GAAR although the particular circumstances of a real situation will have to be examined before a final determination can be made.
23 February 1990 Memorandum (July 1990 Access Letter, ¶1346)
GAAR will not apply where a parent corporation transfers publicly-traded shares with unrealized gains to a wholly-owned subsidiary on a rollover basis, and the subsidiary (which has shelter) immediately sells the shares back to the parent corporation for fair market value consideration.
6 February 1990 Memorandum (July 1990 Access Letter, ¶1345)
GAAR applies to transactions whereby (a) on the last day of Partnership A's fiscal year, Partnership B acquires a 99.9% interest in A, (b) in calculating its income for that fiscal period A deducts the maximum CCA for that fiscal year in respect of a depreciable asset owned by it, (c) on the following day A is wound-up pursuant to s. 98(3), and (d) B, in calculating its income for the fiscal year of 365 days ending two days following the end of A's fiscal year, deducts the maximum allowable CCA regarding that asset - assuming that the primary purpose of the transaction was to double the amount of CCA deductions and to avoid the application of s. 13(21)(f)(iv).
11 January 1990 T.I. (June 1990 Access Letter, ¶1283)
The use of cash and term deposits to pay off liabilities in order to qualify as a qualified small business corporation at the time of the disposition of the corporation's shares would not constitute an abuse or misuse.
15 November 89 T.I. (April 90 Access Letter, ¶1187)
A corporation ("Opco") is owned by brothers and sisters who wish to realize the value of its shares on a tax-free basis and to transfer those shares to their children. Each child would incorporate a holding company and each brother and sister would sell his or her shares to one or more holding companies for a note and/or preferred shares. In the view of RC, these transactions would avoid s. 84.1 and provide the brothers and sisters with a tax benefit in the form of an s. 110.6 deduction. Accordingly, the transactions would result in tax benefits under s. 245(1).
15 November 89 T.I. (April 90 Access Letter, ¶1186)
X amalgamates its subsidiary A (which has not depreciated its assets for tax purposes) with subsidiary B (whose depreciable property is fully depreciated), in order to avoid recapture of depreciation on a sale of the assets formerly held by B. It was assumed that A and B carried on the same business. RC was of the view that because there are no restrictions in the Act against transferring property between related corporations, these transactions would not result in an abuse or misuse.
25 October 89 T.I. (March 1990 Access Letter, ¶1161)
The exemption in s. 245(4) potentially could apply to an arrangement whereby a corporation with non-capital losses becomes a personal services business and uses those non-capital losses to offset what, in substance, is employment income.
20 October 89 T.I. (March 1990 Access Letter, ¶1158)
The sale by a corporation with non-capital losses which are about to expire of a capital property to its wholly-owned subsidiary at fair market value would not ordinarily be considered to result in a misuse or abuse. However, there will be considered to be a misuse or abuse if the transfer of the assets was undertaken to avoid a specific rule.
25 September 89 Memorandum (February 1990 Access Letter, ¶1127)
Arrangements that may circumvent the charitable donations limitation in ss.110.1(1)(b) and 118.1(1) are not subject to s. 245(2).
89 C.R. - Q.41
S.245 will not be applied where a taxpayer sells property to sustain a loss and then repurchases the property 31 days later. "Since this transaction would have been subject to the scrutiny of a specific provision of the Act, but would clearly be outside of its stated ambit, it would not result in a misuse."
89 C.R. - Q.42
RC will not apply s. 245 to subject offshore trust, of which Canadian residents are beneficiaries, to Canadian tax prior to the exploration of the 16-month period referred to in s. 94, unless the offshore trust has been structured in a manner to avoid the application of other provisions such as s. 75(2).
89 C.R. - Q.43
A partnership which is subject to the rental-property restriction rules as a result of being over-leveraged has its partners borrow money, and use those monies to make capital contributions to the partnership which in turn are used to pay off debt of the partnership. "The holding of the debt outside the partnership in order to circumvent the Regulation 1100(11) restriction on CCA would be considered to result in an abuse." However, if the funds were borrowed by the partners at the date the rental property was originally acquired by the partnership, these transactions might reasonably be considered to have been undertaken primarily for non-tax purposes, e.g., the financing of the partnership in order to permit it to acquire the rental property.
89 C.R. - Q.44
GAAR would not ordinarily apply to the transfer by an individual of his shares of a family farm corporation to his children using the provisions of s. 73(4) immediately followed by the sale by the children of their shares to a non-related party for proceeds resulting in a capital gain eligible for the $500,000 lifetime capital gain exemption.
89 C.R. - Q. 3
The deposit by a non-resident of funds with the non-resident financial institution that in turn loans funds to a Canadian corporation with which the non-resident individual does not deal at arm's length could constitute an avoidance transaction. Assuming that it is an avoidance transaction, it would be considered to be a misuse of s. 212(1)(b)(vii).
October 1989 Revenue Canada Round Table - Q.23 (Jan. 90 Access Letter, ¶1075)
An individual transfers all the shares of Holdco, which are "qualified small business corporation shares", to Newco, elects under s. 85(1) in order to realize $400,000 in capital gain, and then amalgamates Newco with Holdco, with the result that he now holds shares of Newco with a stepped-up basis. Such transaction does not result in a misuse or an abuse. The answer would be different if the transaction were structured to void the application of ss.84.1, 85(2.1) or to result in dividends stripping.
October 1989 Revenue Canada Round Table - Q.21 (Jan. 90 Access Letter, ¶1075)
In the context of a discussion of Friedberg, RC indicated that s. 245 might be applied to control abusive practices by taxpayers. However, GAAR might not be applied when there is a legitimate reason to use the "lower of cost or market" method, for example, where that method is used by manufacturing concerns as a hedge against the risk of losses arising from the production of certain goods.
October 1989 Revenue Canada Round Table - Q.11 (Jan. 90 Access Letter, ¶1075)
It is acceptable for an individual taxpayer to stepped-up the basis of his qualified small business corporation shares by exchanging those shares for other shares of the same corporation having the same paid-up capital, but with an elected amounts sufficient to trigger the requisite amount of capital gain.
October 1989 Revenue Canada Round Table - Q.4 (Jan. 90 Access Letter, ¶1075)
The temporary injection of capital into a partnership in order to avoid the realization of gain on a rollover transaction would appear to contravene the precise goal of s. 100(2) which is the realization of a capital gain in such circumstances. However, the previously observed practice of RC was to show tolerance where the transaction was motivated by economic or commercial considerations.
29 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1084)
Because specific provisions such as ss.67, 69 and 56(2) are sufficient to address abuses which might otherwise arise from the use of professional service corporations, GAAR should normally not apply to such arrangements.
89 C.R. - Hiltz Paper (C.7)
88 C.R. - "Small Business Corporation Shares" - "'GAAR' and QSBC Shares"
The "purification" of a CCPC in order to qualify its shares as QSBC's, and dispositions made in order to use up the capital gains exemption, do not constitute a misuse or abuse.
89 C.M.TC - "Section 245 of the Income Tax Act"
The incorporation of a special purpose sub to hold debt on an amalgamation, thereby avoiding the application of s. 80(2), is an abuse.
Borrowing at the partner, rather than the partnership, level in order to avoid the application of s. 18(3.2) or 18(2), is not an abuse.
M. Hiltz, "Section 245 of the Income Tax Act", 1988 Conference Report, c.7.
IT-96R5 "Options Granted by Corporations to Acquire Shares, Bonds or Debentures" under "Anti-Avoidance Provisions"
ATR-44
An arrangement where a parent company uses borrowed funds to invest in the preference shares of a subsidiary which lends those funds to the parent at prime plus 1%, results in a tax benefit, but not an abuse.
Articles
Alan M. Schwartz, Kevin H. Yip, "Policy Forum: Defending Against a GAAR Reassessment", Canadian Tax Journal (2014) 62:1, 129-46.
Admissibility of broader range of extrinsic evidence (pp. 136-7)
Rather than determining the meaning of the statute, the GAAR analysis requires a search for "the rationale that underlies the words that may not be captured by the bare meaning of the words themselves" [citing: Copthorne…2007 TCC 481, at para. 66.]
This suggests to us that the extrinsic evidence supporting the GAAR analysis should be broader than that normally used to interpret…other provisions of the Act. Such evidence includes contemporaneous documents indicating what the government policy makers and legislative drafters were considering at the time the provisions were drafted and introduced. We also suggest that extrinsic evidence should be broader than the "official policy" set out in the technical notes and could, for example, include the policy choices not to do certain things….
Access to Information requests for policy papers (p. 138)
One strategy that taxpayers may find useful is making a request for information from the CRA or...Finance. ...There are exemptions and exclusion from disclosure such as..."advice or recommendations," and third-party information. However, these exceptions and exclusions should be interpreted in a limited and specific way. [citing Canadian Council of Christian Charities v. Canada, [1993] 3 CTC 123, at para. 15 and Ontario (Finance) v. Ontario (Information and Privacy Commissioner), 2012 ONCA 125. [See also Access to Information Act, s. 21]] ...[T]he taxpayer should be entitled to access information about the tax policy of the specific provisions at issue.
No general stop-loss policy (p. 140)
The courts have found that there is no general unexpressed policy regarding the stop-loss provisions, but appear to have expressed a general policy regarding business losses [citing: Landrus, 2009 FCA 113, 1207192, 2011 TCC 383, Triad Gestco, 2011 TCC 259 and Global Equity, 2012 FCA 272.
Policy against income-splitting? (p. 141)
It is less clear whether there is an overarching purpose against income splitting. [citing: Overs, 2006 TCC 26, Lipson, 2009 SCC 1, at para. 31, Swirsky v. The Queen, 2013 TCC 73 [aff'd 2014 FCA 36].]
No general policy against surplus-stripping (p. 143)
[T]he courts have found that there is no overarching policy against surplus stripping [citing: Evans, 2005 TCC 684, at para. 30, McMullen, 2007 TCC 16, Copthorne, 2011 SCC 63 at para. 118, Gwartz, 2013 TCC 86, at paras. 50-51, MacDonald, 2012 TCC 123, rev'd 2013 FCA 110, cf. Desmarais, 2006 TCC 44.]
David H. Sohmer, "Copthorne, Global Equity Fund, and the GAAR: Stubart Redux", The Canadian Taxpayer, January 25, 2013 – Vol. XXXV No.2, p. 9 at p.11: "As a result of the dilution of the requirements for clarity of text and clarity of legislative purpose, the GAAR now appears to have reverted to a statutory codification of the guidelines established by the Supreme Court in the case of Stubart...."
Steve Suarez, "Tax Court Compels Disclosure in GAAR Case", Tax Notes International, Vol. 69 No. 3, 21 January 2013, p. 238: Regarding the significance of the finding in Birchcliff that the CRA can be compelled in GAAR litigation to disclose what it determined to be the policy of the provisions in question at the time the GAAR assessment was made, Suarez stated:
While it is open to the Crown during the course of the litigation to allege the existence of a different object, spirit or purpose than the one relied on in making the reassessment, that variation in its reasoning will now be transparent and the courts may question the strength of the CRA's arguments in situations in which it has changed the policy it says has been contravened.