Table of Contents


Hidden Valley Golf Resort Assn. v. Canada, [2002] GSTC 42 (FCA)

incidence of GST does not turn on nomenclature

Before going on to find that the leasing by the Appellant of cottage properties was a single supply of exempt residential accommodation, Sharlow JA stated:

There may or may not be an issue as to whether the term "rent" correctly describes all the payments required by the sublease. That is not a debate that must be resolved in this case. It is common ground that the incidence of GST does not depend on mere nomenclature.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply lease was root of transaction 100
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part I - Section 7 leasing of serviced premises was exempt 128

Mollinaro v. The Queen, 2000 DTC 6114 (FCA)

Pursuant to an agreement in which the taxpayer's holding company agreed to sell all the shares of a pizza manufacturing company ("Pizza Crust") to a corporate purchaser ("Catelli"), Catelli agreed to enter into an employment agreement with the taxpayer where he would be paid approximately $1.8 million over three years, of which he would be entitled to receive $1.5 million even if he died or was terminated for good reason.

Sexton J.A. rejected a submission of the taxpayer that the payment of $1.5 million was in substance proceeds of disposition of his capital interest in Pizza Crust. First, the taxpayer himself was owe no capital payment by Catelli. Second, given that the employment agreement had most of the terms of usual employment agreements and was seriously negotiated with lawyers and accountants representing the taxpayer, its substance was that of an employment agreement.

Canada v. Pinot Holdings Ltd., 99 DTC 5772 (FCA)

Noël J.A. indicated that the following statement from IRC v. Duke of Westminister, [1935] AC 1 at 30-31 remained "eminently good law":

"And what the legal effect is as between the covenantor and the covenantee must determine for revenue purposes the character of the payments actually made ... . And once it is admitted that the deed is a genuine document, there is in my opinion no room for the phrase 'in substance'. More correctly, the true nature of the legal obligation and nothing else is 'the substance'."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) partnership not transparent re partnership borrowing to pay vendor partner 160

Shell Canada Ltd. v. Canada, 99 DTC 5669, [1999] 3 S.C.R. 622

legal relationships prevail over economic realities

In the course of rejecting a submission that a borrowing in New Zealand dollars by the taxpayer at 15.40% interest should be treated (in light of the hedging arrangements of the taxpayer) as giving rise to an interest deduction only to the extent of the 9.1% rate that a U.S.-dollar borrowing would have yielded, McLachlin J. stated (at p. 5676):

"First, this Court has never held that the economic realities of a situation can be used to recharacterize a taxpayer's bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer's legal relationships must be respected in tax cases. Recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect ... . Second, it is well established in this Court's tax jurisprudence that a searching enquiry for either the 'economic realities' of a particular transaction or the general object and spirit of the provision at issue can never supplant a court's duty to apply the unambiguous provisions of the Act to a taxpayer's transaction."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance taxpayes entitled to rely on structure of their transactions 152
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) borrowing in legal substance was in weak currency 170
Tax Topics - Income Tax Act - Section 67 90
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange FX hedging gain was capital gain as hedged borrowing was on capital account 217
Tax Topics - Statutory Interpretation - Specific v. General Provisions 90

Continental Bank Leasing Corp. v. Canada, 98 DTC 6505, [1998] 2 S.C.R. 298

question of constructing the genuinely-reflective documents

In finding that the taxpayer and other corporations had been successful in creating a partnership through entering into an agreement that was styled a partnership agreement, Bastarache J. stated (at para. 21):

[I]t is necessary to examine the documents outlining the transaction to determine whether the parties have satisfied the requirements of creating the legal entity that it sought to create. The proper approach is that outlined in Orion Finance Ltd. v. Crown Financial Management Ltd., [1996] 2 B.C.L.C. 78 (C.A.), at p. 84:

...Once the documents are accepted as genuinely representing the transaction into which the parties have entered, its proper legal categorisation is a matter of construction of the documents. This does not mean that the terms which the parties have adopted are necessarily determinative. The substance of the parties’ agreement must be found in the language they have used; but the categorisation of a document is determined by the legal effect which it is intended to have, and if when properly construed the effect of the document as a whole is inconsistent with the terminology which the parties have used, then their ill-chosen language must yield to the substance.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality statutory statement that illegal act not invalid 179
Tax Topics - Income Tax Act - Section 96 5 day partnership with tax motivation 161

Pardee Equipment Ltd. v. The Queen, 97 DTC 5279 (FCTD)

Although the form of the document governing the delivery of equipment to the taxpayer was that of consignment, Reed J. found that the proper legal characterization was a sale subject to a security interest held by the supplier until the purchase price was fully paid. "Of primary importance for the characterization is the fact that the machines are not and cannot be returned to Deere." (p. 5283)

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership "consignment" was true sale given that equipment could not be returned 66

The Queen v. Friedberg, 92 DTC 6031 (FCA), rev'd 93 DTC 5507, [1993] 4 S.C.R. 285

Before finding against the taxpayer, Linden, J. A. stated (p. 6032):

"In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax ... If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the Courts would be engaged in endless exercises to determine the true intentions behind certain transactions."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance subjective intention does not alter transactions 150
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts 204

Gesser Estate v. The Queen, 89 DTC 5274 (FCTD), rev'd 92 DTC 6273 (FCA)

taxing statutes applied on basis of legal rights

Pinard J. applied the principle (stated in Simon's Income Tax) "that the taxing Acts are to be applied in accordance with the legal rights of the parties to a transaction. It is those rights which determine what is the 'substance' of the transaction in the correct usage of that term."

Shaw v. The Queen, 89 DTC 5194 (FCTD), aff'd 93 DTC 5213 (FCA)

In order to determine the substance of a non-arm's length transfer of a business from a partnership to a corporation, regard was had to the subsequent conduct of the parties. [C.R.: "Intention"]

Choquette v. The Queen, 74 DTC 6563 (FCTD)

In finding that the description of a payment made to the taxpayer in an agreement as a capital sum was not conclusive, Décary J. quoted the dictum from IRC v. Wesleyann General Assurance Society, [1948] 1 All E R 5555-5557, and then stated (at p. 6565):

"This principle of the relationship of form and substance is, in my opinion, an elementary principle, not only of interpretation but of justice, which allows us to disregard legalism and formalism in determining the true nature of a contract."

Automatic Toll Systems (Canada) Ltd. v. MNR, 74 DTC 6060, [1974] CTC 30 (FCTD)

When the taxpayer contacted an agent to determine what was required in order to terminate its obligation to pay the agent a 10% commission on further contracts to be procured by the taxpayer, the agent proposed that the taxpayer pay $60,000 for certain shares and leases. It was found that "the various arrangements under which the sum of $60,000.00 was paid by the appellant were ... a mere machinery created for the purpose of cancelling the contract." The fees accordingly were deductible.

The Queen v. F.H. Jones Tobacco Sales Co. Ltd., 73 DTC 5577, [1973] CTC 784 (FCTD)

In determining whether an obligation was that of a corporation or its shareholder, Noel, J. stated: "The Court must consider the situation from a businessman's point of view, and not dwell on technicalities which may be relevant in other types of proceeding in which, for instance, the company challenged the existence of the obligation, but which have no relevance here."

MNR v. Import Motors Ltd., 73 DTC 5530, [1973] CTC 719 (FCTD)

The court accepted the taxpayer's submission "that it is the real character of the transaction and not the name given to it or the method by which it is carried out which governs its taxability and in order to discover the real purpose of the transaction all of the surrounding circumstances must be examined."

The character of the receipt in question as compensation for the destruction of the wholesale branch of its business was not affected by the possible lack of legal entitlement of the taxpayer to compensation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments periodic payments styled by payor as compensation for lost discounts were damages for crippling of business 104

Huston v. MNR, 61 DTC 1233, [1961] CTC 414 (Ex.Ct.)

In finding that no portion of payments received from the War Claims Fund was interest income, Thurlow, J. stated that the payments 'take their nature not from the motives for making them or from what they are called, but from what in substance they are."

See Also

ING Intermediate Holdings Ltd v HMRC, [2017] EWCA Civ 2111

court only goes behind the contract if the contract does not reflect the true agreement

Although accepting (per BLP) that a mere borrowing by a company is not a supply by it, Arden LJ accepted the finding below that the services provided by ING to its on-line depositors (including 24-hour access to their deposits) were more than merely “peripheral” to the borrowing represented by the deposits, so that ING was engaged in an exempt banking business. After referring (at para. 27) to a submission of taxpayer’s counsel that “the additional service was not one of the economic purposes of the transaction” (para. 27) she stated (at paras 29, 37):

…[O]n Mr Prosser's submission, the Upper Tribunal erred in law in not seeking to determine and apply the economic purpose of the contract of deposit. …

I accept that, when determining the nature of a transaction for VAT purposes, the court must look at the economic purpose of the transaction. However, the starting point is to determine what the parties have agreed. … [T]he court only goes behind the contract if the contract does not reflect the true agreement between the parties.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply services provided in deposit-taking business were more than peripheral so that supplies were made 262
Tax Topics - Excise Tax Act - Section 153 - Subsection 153(1) interest paid by bank to depositors was reduced by implied fees earned as consideration going to the bank 137
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (c) borrowing is not by itself a supply by borrower 61

Crooks v. The Queen, 2016 TCC 52 (Informal Procedure)

the addition of an accommodation co-purchaser (for financing purposes) of condo did not reflect the parties' true intentions

An agreement for the purchase of a new condo by the appellant was amended shortly before closing at the insistence of the mortgage lender to add her friend as a co-purchaser. Hershfield J found that the amended purchase agreement entailed, at most, a supply of a co-ownership interest in the property by the appellant to her friend in consideration for her friend’s guarantee – and did not result in any interest in the condo also being supplied by the builder to the friend (so that the new housing rebate was not denied to the appellant). In this regard, he stated (at para. 23):

The amended agreement did nothing of substance. Indeed, if such an agreement had been entered into to gain an unintended tax advantage, it might be seen as a wholly artificial transaction – a sham. That it should stand in the way of allowing an intended incentive, would be to allow for a re-characterization of the true legal relationships, entitlements and obligations that exist in this case.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 254 - Subsection 254(2) - Paragraph 254(2)(a) accommodation co-owner was not supplied her interest directly by the builder 422
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Recipient “ultimate liability” doctrine indicated an accommodation co-purchaser of condo was not a recipient 277
Tax Topics - Excise Tax Act - Section 262 - Subsection 262(3) accommodation co-purchaser (for financing purposes) of condo was not a recipient of supply by builder 213
Tax Topics - General Concepts - Sham the addition of an accommodation co-purchaser (for financing purposes) of condo might have been a sham if done for tax purposes 125
Tax Topics - Statutory Interpretation - Benefits-Conferring Legislation interpretation to favour conferral of intended benefits 183

Commissioners for HM Revenue and Customs v. Secret Hotels2 Ltd., [2014] UKSC 16

characterize before attaching label

Before going on to find that an agreement under which the appellant was stipulated to act as agent in fact created an agency relationship, Lord Neuberger stated (at para. 32):

When interpreting an agreement, the court must have regard to the words used, to the provisions of the agreement as whole, to the surrounding circumstances in so far as they were known to both parties, and to commercial common sense. When deciding on the categorisation of a relationship governed by a written agreement, the label or labels which the parties have used to describe their relationship cannot be conclusive, and may often be of little weight. As Lewison J said in A1 Lofts Ltd v Revenue and Customs Commissioners [2010] STC 214, para 40, in a passage cited by Morgan J:

  • "The court is often called upon to decide whether a written contract falls within a particular legal description. In so doing the court will identify the rights and obligations of the parties as a matter of construction of the written agreement; but it will then go on to consider whether those obligations fall within the relevant legal description. Thus the question may be whether those rights and obligations are properly characterised as a licence or tenancy (as in Street v Mountford [1985] AC 809); or as a fixed or floating charge (as in Agnew v IRC [2001] 2 AC 710), or as a consumer hire agreement (as in TRM Copy Centres (UK) Ltd v Lanwall Services Ltd [2009] 1 WLR 1375). In all these cases the starting point is to identify the legal rights and obligations of the parties as a matter of contract before going on to classify them."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency terms reflected agent's dominance 212

Revenue and Customs Commissioners v. First Nationwide, [2012] BTC 99, [2012] EWCA Civ 278

The fact that the payment of a dividend out of the share premium account of a Caymans company reduced the capital that would have been distributable on a winding-up of the company was not relevant as "it is the form by which the payments are made which determines their character" (para. 25). Accordingly, the character of the distribution as a dividend under Caymans company law governed its characterization for UK taxation purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(1) capital v. income character of distributions/payment of dividend out of share premium account 283

Chabaud c. La Reine, 2012 DTC 1076 [at 2856], 2011 TCC 438 (Informal Procedure)

labels not deterinative

In finding that "bursary" amounts a postdoctoral fellow received from his university were in fact remuneration from employment, Archambault J. stated (at para. 75):

[T]he case law has consistently held that the terms used by the parties to describe the nature of their contractual relationship or of the payment one of them receives, although relevant, are not determinative.

Fiducie Famille Gauthier v. The Queen, 2011 DTC 1343 [at 1917], 2011 TCC 318, aff'd 2012 FCA 76

The taxpayer, a family trust, made a non-arm's-length sale of shares to a numbered corporation ("404") for a promissory note of approximately $2.6 million. The numbered corporation then immediately sold the shares at arm's length to a third party ("Keolis") for approximately $2.8 million. The lower sale price on the first transfer reflected that it had been determined that 404 would bear the cost of professional fees, relating to the structuring of the sale to Keolis, of $233,786. In finding that the $233,786 was a deemed dividend received by the taxpayer by operation of s. 84.1(1)(b), Archambault J. stated (at para. 15):

I can understand that in his testimony, the tax consultant whose services the Gaunthier family retained contended that the market value had to be $6,010 [per share] in order to take account of the fact that 404 was to pay the $233,786 in fees. However, in my opinion, it more accurately reflects reality to say that Fiducie transferred 433 shares whose unit market value was $6,550, that the actual selling price of those shares was $2,836,423 (433 × $6550), an amount which, in fact, 404 obtained when it resold the shares to Keolis, and that the consideration given for this market value of $2,836,423 included two elements: a $2,602,637 promissory note, and 404's agreement to pay fees that Fiducie would have had to pay if 404 had not been interposed in the series of transactions carried out to sell the shares in question to Keolis.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) agreement to bear costs was additional consideration 223

Stefanson Farms Ltd v. The Queen, 2009 DTC 177, 2008 TCC 682

An agreement dated October 16, 1998, with an effective date of January 1, 1998, between the taxpayer and shareholder which provided for the purchase by the taxpayer or the shareholder's 99% interest in a partnership, and a January 3, 1998 agreement for the purchase by the taxpayer of the remaining 1% interest in the partnership, were not documents that the taxpayer was now permitted to disavow on the basis that they did not reflect the true state of affairs. The Courts have given short shrift to such taxpayer arguments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 101

Ceco Operations Ltd. v. The Queen, 2006 DTC 3006, 2006 TCC 256

In finding that a transfer by the taxpayer of business assets to a partnership in consideration for partnership units and non-units consideration ("boot") should not be recharacterized as a transfer by the taxpayer solely for boot, notwithstanding that the partnership thereafter indirectly distributed cash to the holding-company shareholders of the taxpayer by subscribing for preferred shares, Bonner J. noted that cases cited to him involving a preference for the supposed substance of transactions over their form were contrary to the approach taken by the Supreme Court of Canada in Shell Canada Ltd. v. The Queen.

Queenswood Land Associates Ltd. v. The Queen, 97 DTC 1048 (TCC), rev'd 2000 DTC 6065, Docket: A-182-97 (FCA)

rev'd on other grounds 2000 DTC 6065, Docket: A-182-97 (FCA)

An amount paid by the taxpayer that had been labelled a "fee" was found to represent a reduction of indebtedness owing by it to the recipient of the payment given that it was agreed that the payment should be so applied.

Entré Computer Centers Inc. v. The Queen, 97 DTC 846 (TCC)

Payments made by Canadian franchisees to the taxpayer that were calculated as a mark-up on the value of products sold by the taxpayer to them were found not to be royalties for purposes of s. 212(1)(d) notwithstanding that, in order to avoid the application of the Robinson Patman Act, the franchise agreement provided that the mark-ups "shall be deemed to be considered a license fee charged for the license granted by the Franchise Agreement to Franchisee to use the Proprietary Marks in connection with the Franchisee's operation of an Entré Computer Center at the Center Location".

Collins v. The Queen, 96 DTC 1034 (TCC)

Before rejecting a submission that the taxpayer had held half of his shares of a private company on a resulting trust for his wife, Bowman TCJ. refer to the complex and sophisticated legal structure that the taxpayer, his wife and their advisors had adopted for holding their business interests and stated (at p. 1039):

"If one knowingly and intentionally adopts one legal structure to achieve a particular fiscal or commercial result it would take far more cogent evidence than I have seen here to permit a taxpayer to discard one portion of that structure when that portion turns out to be fiscally inconvenient."

Stafford v. The Queen, 93 DTC 438 (TCC)

Before rejecting a submission that the taxpayer should be regarded as having received options on behalf of another person notwithstanding the form of the documents, Bonner J. stated (p. 441):

"Any conclusion as to the substance of a transaction must rest not on words chosen by the parties to describe the transaction or on some loose or imprecise view of what the transaction amounted to. Rather they must rest on the legal nature of the transaction ..."

Viceroy Rubber and Plastics Ltd. v. MNR, 93 DTC 347 (TCC)

substance based on analysis of agreement

Before going on to find that an agreement, which was in the form of a lease, in substance was a sale agreement, Brulé J. stated (p.354) that:

"It is evident from the case law that in determining the true character of an agreement between parties, the substance (as opposed to the form) of the agreement is of paramount importance. In assessing the common intent of the parties to a transaction, one must analyze the agreement itself, the language used therein, the purpose and the circumstances surrounding the transaction in their entirety."

McArdle Estate [No. 2] v. MNR, 62 DTC 402 (TAB)

mistaken nomenclature ignored if inconsistent with governing intention

After finding that a transaction was in substance a re-allotment of shares rather than their redemption notwithstanding that a resolution referred to the shares being redeemed, Mr. Boisvert referenced (at p. 411) the principle in Granby “that mistaken nomenclature in documents may be ignored if the course of conduct of a taxpayer is consistent throughout with the governing intention… .”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) repurchase and re-allotment of shares was not a redemption 374

No. 115 v. MNR, 53 DTC 338 (ITAB)

Payments received by the taxpayer which were stipulated to be consideration for his agreement not to engage in the lobster business within two specified counties were found not to be employment income to him pursuant to what now is s. 6(3)(e) because of the words in that provision referring to "irrespective ... [of] the form or legal effect" of the agreement, and on the basis of evidence that the company and the taxpayer were not engaged or even interested in the lobster business and that the covenant was only given in order to make the obligation to make the payments legally enforceable.

Foster v. M.N.R, 51 DTC 232 (ITAB)

The legal effect of a lease and option-purchase agreement entered into the taxpayer was found to be a sale agreement, with the result that "rent" payments received by the taxpayer represented tax-free capital receipts.

Administrative Policy

7 February 2014 External T.I. 2014-0516921E5 F - Crédit et frais résiduels

lease characterized as lease unless its actual legal effects differ

Before going on to analyse automobile leases - under which the lessee bore all risk including being responsible for the rents even if the automobile was stolen or destroyed, and bearing at termination of the lease any difference between the actual sale price of the automobile by the lessor and the residual value stated in the lease – on the basis that they were leases, CRA stated:

[I]n the absence of sham … for the purposes of the Act a lease agreement is a lease agreement and a sale contract is a sale contract. … [A] recharacterization is only possible where the taxpayer's characterization of the transaction does not adequately reflect its actual legal effects. …[T]he determination of the nature of the contractual relationship between the Employer and the Leasing Corporation is one of fact and law to be considered by the parties.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property lease/sale distinction established based on the legal relationship 93
Tax Topics - Income Tax Act - Section 6 - Subsection 6(2) employer potentially can choose to prorate terminal credits or deficiencies (based on sale price on car lease termination relative to residual value) in applying formula 246
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A lease under which lessee bore all risk implicitly treated as lease rather than purchase 171

Income Tax Technical News, No. 21, June 14, 2001

"Recharacterization is permissible only if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect."

20 January 1999 T.I. 983230

"Generally, we will rely on the assumption that the form of a particular lease agreement reflects the true relationship between the parties so that the lease would be treated as a lease for the purposes of the Act."

89 C.R. - Q.8

"A transaction that takes the form of a lease will ordinarily be treated as a lease for the purposes of the Act, on the presumption that the agreement is what it purports to be and that the legal rights under the agreement are those of a lessor and lessee."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 87

88 C.R. - "Finance and Leasing" - "Leasing"

RC will normally rely on the assumption that the form of an agreement reflects the true relationship of the parties involved.

88 C.R. - F.Q.23

There is no conflict with GAAR in characterizing a transaction based on the legal rights and obligations of the parties.


Thivierge, "Emerging Income Tax Issues: Substance Over Form Revisited, Section 160 of the Income Tax Act, and Series of Transactions", 1993 Conference Report, c. 4

Pound, "Remedial Tax Planning: How to Fix It When It's Broke", 1993 Conference Report, c. 9, pp. 9:21 - 24.