Coast Capital – Federal Court of Appeal rejects an apparent attempt to argue that an inflated purchase price should be bifurcated between a FMV cost and a benefit conferral

The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs effectively were stripped to offshore accounts. The trustee sought to amend its Notice of Appeal, from an assessment for failure to withhold under s. 116(5), by adding an assertion that the purchase transactions were shams.

In denying this request, V. Miller J in the Tax Court had stated: "in a tax case, a court will make a finding of ‘sham’, only when it is the Minister who is deceived." Gleason JA affirmed on the narrower ground that any deception of the trustee was irrelevant to the assessment, which turned only on the trustee having purchased taxable Canadian property shares from a non-resident.

The trustee also sought an amended pleading that the cost to it of the shares was their fair market value, apparently intending to argue that the purchase price in excess of the shares’ fair market value should instead be construed as the “conferral of a benefit to the annuitants and the promoters,” rather than as cost of the shares (so that s. 116(5) withholding only applied to the modest FMV). Gleason JA (like V. Miller J below) found that this approach (implicitly of bifurcation) flew in the face of the Stirling doctrine as to the meaning of “cost.”

Neal Armstrong. Summaries of Coast Capital Savings Credit Union v. Canada, 2016 FCA 181 under General Concepts – Sham and s. 116(5).