Dockets:
A-327-13
A-328-13
Citation: 2014 FCA 103
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CORAM:
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BLAIS C.J.
SHARLOW J.A.
STRATAS J.A.
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Docket:
A-327-13
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BETWEEN:
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HER MAJESTY THE QUEEN
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Appellant
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and
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LEHIGH CEMENT LIMITED
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Respondent
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Docket:
A-328-13
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AND BETWEEN:
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HER MAJESTY THE QUEEN
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and
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CBR ALBERTA LIMITED
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Respondent
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REASONS FOR
JUDGMENT
STRATAS J.A.
[1]
In these consolidated appeals, the Crown appeals
from the judgment dated May 29, 2013 of the Tax Court of Canada (per
Justice Paris): 2013 TCC 176.
[2]
As will be described, Lehigh Cement Limited (“Lehigh”) and CBR Alberta Limited (“CBR
Alberta”) (collectively the “taxpayers”) acquired
shares of a non-resident corporation as part of a wider, complex restructuring
consisting of many steps. In their returns for the 1996 and 1997 taxation
years, the taxpayers claimed a deduction offsetting the amount of the dividends
received from the non-resident corporation, relying upon paragraph 113(1)(a)
of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). The Minister
reassessed, disallowing the deductions.
[3]
In disallowing the deductions, the Minister
applied paragraph 95(6)(b) of the Income Tax Act, an
anti-avoidance provision. In her view, that anti-avoidance provision applied
because (paraphrasing the language of paragraph 95(6)(b)) the taxpayers
had acquired shares of the non-resident corporation for the principal purpose
of avoiding the payment of tax that would otherwise be payable under the Act.
[4]
In the Tax Court, the parties debated the
principal purpose of the taxpayers’ acquisition of shares of the non-resident
corporation. They also debated whether paragraph 95(6)(b) should be
interpreted broadly as the Crown contended, or narrowly as the taxpayers
contended.
[5]
The Tax Court allowed the taxpayers’ appeals
from the reassessments. While it agreed with the Crown concerning the breadth
of paragraph 96(5)(b), it found that the paragraph did not apply to the
taxpayers in these circumstances because there was no tax that would
have otherwise been payable. The Minister appeals.
[6]
For the reasons set out below, I agree in result
with the Tax Court but for different reasons. I would dismiss the appeal.
A. The basic facts
(1) The taxpayers
[7]
The taxpayers, Lehigh, a cement and building
products manufacturer in Canada, and its wholly owned subsidiary, CBR Alberta,
were Canadian companies. They belonged to a corporate group known as the CBR
Group. The CBR Group operated in Europe, North America and Asia. The parent of
the CBR Group was a Belgian company, CBR SA.
(2) The event giving rise to the
issue in this case
[8]
In 1991, Lehigh’s U.S.-incorporated sister
company, CBR Cement Corporation (“CBR US”) began to incur operating losses. By
the end of 1994, its book losses totalled US$94.8 million. Its activities
in the U.S. were financed by debt and equity including: (1) amounts
borrowed from CBR SA and CBR Asset Management Luxembourg (“CBR AM”) (which was
wholly owned by CBR SA), and (2) capital contributions from its parent U.S.
company CBR Investment Corporation of America (“CBR ICA”), raised by it from
the sale of preferred shares to Lehigh in 1991. CBR Group decided to refinance
the intercompany debt and equity.
(3) The refinancing
transactions
[9]
The relevant refinancing transactions took place
in 1995. I adopt the Tax Court’s description of them (at paragraphs 27 to 30):
[27] In 1995, the CBR Group decided to refinance the
inter-company debt and equity of CBR US set out above with US$100 million
borrowed by [Lehigh] to be invested in a U.S. LLC and loaned by the LLC to CBR
US.
[28] The refinancing was carried out in two parts. The
CBR SA and CBR AM loans were replaced in a series of transactions carried out
in mid-1995. The preferred shares in CBR ICA held by [Lehigh] were redeemed as
part of another series of transactions carried out in December 1995.
[29] The first series of transactions took place as
follows:
In March 1995, CBR Alberta was incorporated to act as the
second requisite member in the LLC.
On June 27, 1995 the appellants set up a Delaware limited
liability company under the name CBR Developments NAM LLC (NAM LLC). It was
structured as a foreign affiliate of the appellants with [Lehigh] holding
a 99% interest and CBR Alberta holding a 1% interest.
On July 10, 1995:
- [Lehigh] borrowed US$60 million from Citibank Canada Inc. at an
annual interest rate of 6.7% in exchange for a promissory note.
- Citibank sold the right to receive future interest
payments under the note to Brussels Bank Lambert (BBL) and sold the right to
receive the principal to CBR International Services SA (CBR IS), a Belgian
company ultimately owned by CBR SA. CBR IS acted as the treasury centre for the
CBR Group. It obtained the capital required for the purchase through an
increase in capital from CBR SA.
- [Lehigh] used part of the borrowed funds to subscribe for preferred
shares in CBR Alberta, bringing the total capital invested by [Lehigh] in CBR
Alberta to US$600,000.
- [Lehigh] contributed US$59.4 million (i.e. the remainder of the
borrowed funds) to NAM LLC, and CBR Alberta contributed US$600,000.
- NAM LLC lent US$60 million to CBR US at an annual
interest rate of 8.25%.
- CBR US used these funds to pay off the CBR SA and CBR AM
loans.
[30] The second series of transactions took place as
follows:
On December 22, 1995, [Lehigh] borrowed US$40
million from BBL at an annual interest rate of 6.84%, or at a fluctuating rate
depending on the circumstances;
On December 27, 1995, [Lehigh] subscribed for
preferred shares of CBR Alberta for US$400,000;
[Lehigh] and CBR Alberta made additional capital contributions of
US$39.6 million and US$400,000, respectively, to NAM LLC;
On or before December 31, 1995, NAM LLC loaned an
additional US$40 million to CBR US at an annual interest rate of 8.25%;
CBR US paid a dividend of US$40 million to CBR ICA;
CBR ICA used the proceeds of the dividend to redeem the
preferred shares held by [Lehigh];
As of December 31, 1995, [Lehigh] and CBR Alberta
had made total contributions of capital to NAM LLC of US$99 million and US$1
million, respectively.
[10]
The parties take no issue with the Tax Court’s
analysis of the anticipated tax results. The Tax Court described them as
follows (at paragraphs 31 to 35):
[31] The refinancing was expected to produce tax
savings of US$1.92 million per year in Canada for [Lehigh] and US$1.19 million
per year for CBR SA in Belgium.
[32] For the appellants, the tax savings were expected
to result from the deduction for interest paid on the money borrowed by
[Lehigh] to purchase the shares of NAM LLC and from the fact that the dividends
received by the appellants from NAM LLC would be tax exempt.
[33] For CBR SA, the tax savings were expected to
originate from an exemption under Belgian tax law on dividends to be received
from CBR IS.
[34] CBR US was not expected to have any net income
until 1997. Therefore, while it was not expected that CBR US would obtain a tax
benefit in the years 1995 to 1997 for the interest it paid to NAM LLC, it was
anticipated that its interest expense would increase its net operating losses
to be carried forward for U.S. federal tax purposes.
[35] In addition to the tax benefits already
mentioned, the refinancing also addressed other tax concerns raised by the
financial services division of the CBR Group. It was noted that proposed
changes to Canadian tax law regarding interest deductibility put the interest
deduction on the money borrowed by [Lehigh] to purchase the preferred shares in
CBR ICA at risk, since CBR ICA had not paid dividends to [Lehigh] on those
shares. It was also felt that potential changes to the U.S.-Luxembourg tax
treaty might increase the tax cost of the existing financing. Finally, the U.S. withholding tax on interest payments from CBR US to CBR SA was not fully tax credited in Belgium.
[11]
During the period 1995-1997, CBR US paid over US$15 million to NAM LLC, which paid these amounts to the taxpayers in the
form of dividends in the 1996 and 1997 taxation years.
[12]
In calculating their taxable income for those
years, the taxpayers claimed a deduction offsetting
the amount of the dividends included in income, relying upon paragraph
113(1)(a) of the Act and NAM LLC’s status as a foreign affiliate of both
companies.
[13]
In response, as will be seen, the Minister
reassessed the taxpayers on the basis that their acquisition of shares in the
non-resident corporation NAM LLC was for the principal purpose of avoiding
Canadian tax. Therefore, according to the Minister, the anti-avoidance
provision, paragraph 95(6)(b), applied. The Minister disallowed the
taxpayers’ deductions.
[14]
To appreciate the Minister’s position and to
understand what paragraph 95(6)(b) does, I shall review the legislative
regime associated with paragraph 95(6)(b).
(4) The
legislative regime
[15]
Paragraph 95(6)(b) appears in subdivision
i of Division B of Part I of the Act. The subject-matter is the taxation of
income from non-resident corporations.
[16]
Parliament has chosen to make the taxation of
income received by a Canadian taxpayer from a non-resident corporation depend
upon the type of income and the ownership status of the non-resident
corporation. To take the particular issue in this case as an example, both the
type of income and the ownership status of the non-resident corporation come
into play:
● Type of income. For the
purposes of this case, all that need be said is that under subsection 90(1) of
the Act, dividends received by a Canadian taxpayer from a non-resident
corporation must be included in income when received by the taxpayer. However,
under paragraph 113(1)(a) of the Act, dividends paid by certain
non-resident corporations from exempt surplus may escape taxation in the hands
of the Canadian taxpayer – i.e., the Canadian taxpayer may claim a
deduction offsetting the amount of the dividends included into income. Which
non-resident corporations fall under paragraph 113(1)(a)? That is where
ownership status of the non-resident corporation comes into the analysis.
● Ownership status of the
non-resident corporation. Paragraph 113(1)(a) of the Act applies to
dividends paid by a “foreign affiliate.” Subsection 95(1) defines “foreign
affiliate.” Where a Canadian taxpayer holds at least a one per cent interest of
any class of shares in a non-resident corporation and the taxpayer’s holdings,
when combined with the holdings of any related person, total ten per cent or
more of the class, the non-resident corporation is a “foreign affiliate” of the
Canadian taxpayer.
[17]
For completeness, I observe that the rules in
this Part of the Act are not quite that simple. For example, if the
non-resident corporation has the status of “controlled foreign affiliate,”
certain passive income earned by the non-resident corporation (i.e.,
foreign accrual property income) can be imputed to the Canadian taxpayer even
if the Canadian taxpayer has not received it. But for present purposes, I need
to delve into this legislative scheme only to the extent I have.
[18]
Here is the text of subsection 90(1), the
definition of “foreign affiliate” in subsection 95(1), and the exemption in
paragraph 113(1)(a):
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90. (1) In
computing the income for a taxation year of a taxpayer resident in Canada,
there is to be included any amount received by the taxpayer at any time in
the year as, on account or in lieu of payment of, or in satisfaction of, a
dividend on a share owned by the taxpayer of the capital stock of a
non-resident corporation.
95. (1) In this
subdivision,
…
“foreign affiliate”, at any time, of a taxpayer resident in Canada means a non-resident corporation in which, at that time,
(a) the taxpayer’s equity percentage is not
less than 1%, and
(b) the total of the equity percentages in
the corporation of the taxpayer and of each person related to the taxpayer
(where each such equity percentage is determined as if the determinations
under paragraph (b) of the definition “equity
percentage” in
subsection 95(4) were made without reference to the equity percentage of any
person in the taxpayer or in any person related to the taxpayer) is not less
than 10%,
except that a corporation is not a foreign affiliate of a non-resident-owned
investment corporation;
113. (1) Where in a taxation year a corporation
resident in Canada has received a dividend on a share owned by it of the
capital stock of a foreign affiliate of the corporation, there may be deducted
from the income for the year of the corporation for the purpose of computing
its taxable income for the year, an amount equal to the total of
(a) an amount equal to such portion of the
dividend as is prescribed to have been paid out of the exempt surplus, as
defined by regulation (in this Part referred to as “exempt surplus”) of the
affiliate;
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90. (1) Est à inclure dans le calcul du revenu pour une
année d’imposition d’un contribuable résidant au Canada toute somme qu’il a
reçue au cours de l’année au titre ou en paiement intégral ou partiel d’un
dividende sur une action lui appartenant du capital-actions d’une société
non-résidente.
95. (1) Les définitions qui
suivent s’appliquent à la présente sous-section.
…
« société étrangère affiliée » Quant à une société qui, à un moment donné, est
une société étrangère affiliée d’un contribuable qui réside au Canada,
société non-résidente dans laquelle, à la fois :
a) le
pourcentage d’intérêt du contribuable est d’au moins 1 % à ce moment;
b) le
total du pourcentage d’intérêt du contribuable et de celui de chacune des
personnes qui lui est liée est d’au moins 10 % à ce moment, chaque
pourcentage étant déterminé comme si le calcul prévu à l’alinéa b) de la définition de «
pourcentage d’intérêt » au
paragraphe (4) était effectué compte non tenu du pourcentage d’intérêt d’une
personne dans le contribuable ou dans une personne liée à celui-ci.
Toutefois nulle société
ne peut être une société étrangère affiliée d’une société de placement
appartenant à des non-résidents.
113. (1) Une société résidant au Canada
qui, au cours d’une année d’imposition, a reçu un dividende sur une action
lui appartenant du capital-actions d’une société étrangère affiliée de cette
société peut déduire de son revenu pour l’année, pour le calcul de son revenu
imposable pour cette année, le total des sommes suivantes :
a) la
fraction du dividende qui est, par règlement, considérée comme ayant été
prélevée sur le surplus exonéré défini par règlement (appelé « surplus
exonéré » à la présente partie) de la société affiliée;
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[19]
The “foreign affiliate” status of a non-resident
corporation, which is dependent on the non-resident corporation’s ownership
status, can give rise to tax savings for a Canadian taxpayer because of the
ability to claim a deduction offsetting the amount of
the dividends included into income. And often the Canadian taxpayer can
easily manipulate that status to get those tax savings. For example, it can
transform a non-resident corporation into a “foreign affiliate” by acquiring
more shares in it. Or it can dispose of shares to avoid the non-resident
corporation from becoming a “controlled foreign affiliate.” In this context,
“taxpayers jockey to get on the right side of the distinctions to take
advantage of the rules”: Vern Krishna, The Fundamentals of Canadian Income
Tax (9th ed., 2006) at page 1327.
[20]
To address Canadian taxpayers’ ability to
manipulate the ownership status of non-resident corporations, Parliament
enacted paragraph 95(6)(b). Broadly speaking, paragraph 95(6)(b)
provides that where a person acquires or disposes of shares of a corporation
and it can reasonably be considered that the principal purpose of the
acquisition or disposition is to permit a person to avoid, reduce or defer the
payment of tax, the acquisition or disposition is deemed not to have occurred. Paragraph
95(6)(b) reads as follows:
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95. (6) For the purposes of this subdivision (other than section
90),
…
(b) where a person or
partnership acquires or disposes of shares of the capital stock of a corporation
or interests in a partnership, either directly or indirectly, and it can
reasonably be considered that the principal purpose for the acquisition or
disposition is to permit a person to avoid, reduce or defer the payment of
tax or any other amount that would otherwise be payable under this Act, that
acquisition or disposition is deemed not to have taken place, and where the
shares or partnership interests were unissued by the corporation or
partnership immediately before the acquisition, those shares or partnership
interests, as the case may be, are deemed not to have been issued.
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95. (6) Pour l’application de
la présente sous-section, sauf l’article 90:
…
b) dans
le cas où une personne ou une société de personnes acquiert des actions du
capital-actions d’une société ou des participations dans une société de
personnes, ou en dispose, directement ou indirectement et où il est
raisonnable de considérer que la principale raison de l’acquisition ou de la
disposition est de permettre à une personne d’éviter, de réduire ou de
reporter le paiement d’un impôt ou d’un autre montant qui serait payable par
ailleurs en vertu de la présente loi, les actions ou les participations sont
réputées ne pas avoir été acquises ou ne pas avoir fait l’objet d’une disposition
et, dans le cas où elles n’avaient pas été émises par la société ou la
société de personnes immédiatement avant l’acquisition, ne pas avoir été
émises.
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[21]
If paragraph 95(6)(b) applies, the tax
treatment of any dividend received by the
Canadian taxpayer from the non-resident corporation is determined on the basis
that the shares in issue were not acquired or disposed of, as the case may be.
The intended consequence is to deprive the taxpayer of whatever tax benefit was
sought by the acquisition or disposition of those shares. In this case, if the
Minister correctly applied paragraph 95(6)(b), the practical result is
that the taxpayers would not be able to claim offsetting deductions for the
amounts they received from the non-resident corporations.
(5) The Minister’s position
[22]
The Minister reassessed Lehigh and CBR Alberta
for their 1996 and 1997 taxation years. The Minister denied the taxpayers the
paragraph 113(1)(a) deduction representing the amount of dividends
received from the non-resident corporation, NAM LLC. Her position was that it
could reasonably be considered that the taxpayers’ principal purpose in
acquiring shares in NAM LLC was to avoid taxes that would otherwise be payable
under Part I of the Act. As a result, in the Minister’s view, paragraph 95(6)(b)
applied and deemed the acquired shares not to have been issued for the purpose
of subdivision i of Division B of Part I of the Act (other than section 90).
[23]
Accordingly, in her reassessment, the Minister
included the dividends in the taxpayers’ income but, in calculating their
taxable income, did not allow the deduction under paragraph 113(1)(a).
[24]
Initially, the Minister also relied on the
general anti-avoidance rule in section 245 of the Act but that position was later
abandoned.
(6) The taxpayers’ position
[25]
The taxpayers objected. They say that they
acquired the shares of the non-resident corporation, NAM LLC, for purposes
other than avoiding Canadian tax and, therefore, paragraph 95(6)(b) did
not apply. Accordingly, having received dividends from the non-resident
corporation, they should be permitted to claim the associated deductions under
paragraph 113(1)(a).
(7) The
Tax Court’s decision
[26]
After reviewing the facts of the case, the Tax Court considered
the proper interpretation of paragraph 95(6)(b), applying Canada
Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601.
[27]
In its analysis, the Tax Court focused on the words “the
principal purpose for the acquisition or disposition” in paragraph 95(6)(b).
In its view, the principal purpose of the acquisition or disposition of
shares is central to whether the provision applies.
[28]
The Tax Court held that the principal purpose of an acquisition
or disposition is a question of fact to be determined in consideration of all
the circumstances of the case. One salient fact is whether the acquisition or
disposition is part of a series of acquisitions or dispositions conducted with
a view to avoiding tax. One indication of an anti-avoidance purpose was whether
the specific acquisition or disposition was arranged for a purpose different
from the overall purpose of the series of acquisitions or dispositions.
[29]
The Tax Court found that surrounding provisions, the legislative
evolution of the provisions and statements of legislative intent were consistent
with its interpretation of the purpose test in paragraph 95(6)(b).
[30]
Having interpreted paragraph 95(6)(b) in that way, the Tax
Court proceeded to a three-stage inquiry: it identified the tax otherwise
payable under the Act that the taxpayers are alleged to have intended to avoid,
it determined whether the acquisition or disposition of shares permitted this
avoidance, reduction or deferral, and it assessed the taxpayers’ principal purpose
in acquiring the shares.
[31]
At the first stage of this inquiry, the Tax Court found that the
“tax…that would otherwise be payable” in paragraph 95(6)(b) required it
to compare what happened with the arrangement that might reasonably have been
carried out by the taxpayer where the acquisition or disposition of shares had
not occurred.
[32]
Following this methodology, the Tax Court found that the
taxpayers had shown that there is no tax that would have otherwise been
payable. It accepted the taxpayers’ position that the reasonable alternative
arrangement in this case is one in which Lehigh subscribes for shares directly
in CBR US with borrowed funds. This was in substance the arrangement that
existed after 1997 when NAM LLC was dissolved. In this post-1997 scenario, the
Canadian tax results are the same as those that were achieved in the
transactions at issue here. For good measure, the Tax Court noted that since
the tax savings in issue could have been obtained without acquiring the shares,
it accepted that the acquisition’s principal purpose was to avoid U.S. tax, not Canadian tax.
[33]
The Tax Court concluded that paragraph 95(6)(b) did not
apply to the taxpayers’ acquisition of the shares of the non-resident
corporation, NAM LLC. Therefore, they could rely on paragraph 113(1)(a)
to deduct the dividends received from NAM LLC.
B. Analysis
[34]
Before us are the same two issues that were
before the Tax Court: the factual issue of the taxpayers’ “principal purpose”
in acquiring the shares of the non-resident corporation, and the proper
interpretation of paragraph 95(6)(b). In these reasons, I shall
deal with the latter issue first.
[35]
The taxpayers submit that paragraph 95(6)(b)
focuses upon the principal purpose of the particular acquisition or disposition
of the shares, not the principal purpose of the series of transactions of which
the acquisition or disposition forms a part. It is meant to remedy a situation
where a taxpayer attempts to manipulate the ownership status of a non-resident
corporation for the principal purpose of gaining a tax advantage from that
ownership status. It is not meant to remedy a situation where a taxpayer
engages in a series of transactions that achieve any other favourable tax
result.
[36]
The Crown disagrees and submits that paragraph 95(6)(b)
has a broader anti-avoidance purpose. The Crown argues that in discerning the principal
purpose of an acquisition of shares of a non-resident corporation, one may look
to the entire series of transactions of which the acquisition or disposition
forms a part in order to determine whether there is any tax avoidance purpose
at all.
[37]
To resolve this debate, we must resort to the usual principles of
statutory interpretation. The Supreme Court has set out the governing
principles in Canada Trustco, supra.
[38]
There, the Supreme Court reminded us that the general approach to
the interpretation of all statutory provisions applies to the interpretation of
provisions in taxation statutes. One must look to the text, context and purpose
of the provision (at paragraph 10):
It has been long established as a matter of statutory
interpretation that “the words of an Act are to be read in their entire context
and in their grammatical and ordinary sense harmoniously with the scheme of the
Act, the object of the Act, and the intention of Parliament”: [citation
omitted]. The interpretation of a statutory provision must be made according to
a textual, contextual and purposive analysis to find a meaning that is
harmonious with the Act as a whole. When the words of a provision are precise
and unequivocal, the ordinary meaning of the words play [sic] a dominant
role in the interpretive process. On the other hand, where the words can
support more than one reasonable meaning, the ordinary meaning of the words
plays a lesser role. The relative effects of ordinary meaning, context and
purpose on the interpretive process may vary, but in all cases the court must
seek to read the provisions of an Act as a harmonious whole.
[39]
The provisions in taxation statutes are often
detailed and particular. The Income Tax Act is “an instrument dominated
by explicit provisions dictating specific consequences,” and this invites
“a largely textual interpretation”: Canada Trustco, at paragraph 13.
[40]
As a result, “[w]here Parliament has specified
precisely what conditions must be satisfied to achieve a particular result, it
is reasonable to assume that Parliament intended that taxpayers would rely on
such provisions to achieve the result they prescribe”: Canada Trustco, supra
at paragraph 11. Where the provision at issue is “clear and unambiguous,”
its words “must simply be applied”: Shell Canada Ltd. v. Canada, [1999]
3 S.C.R. 622 at paragraph 40. In such circumstances, a supposed purpose “cannot
be used to create an unexpressed exception to clear language” or “supplant”
clear language: Placer Dome Canada Ltd. v. Ontario (Minister of Finance),
2006 SCC 20, [2006] 1 S.C.R. 715 at paragraph 23, citing P. W. Hogg, J. E.
Magee and J. Li, Principles of Canadian Income Tax Law (5th ed. 2005),
at page 569.
[41]
When interpreting provisions in taxation
statutes, we must keep front of mind their real life context: many taxpayers
study closely the text of the Act to manage and plan their affairs
intelligently. Accordingly, we must interpret “clear and unambiguous” text in
the Act in a way that promotes “consistency, predictability and fairness,” with
due weight placed upon the particular wording of the provision: Canada
Trustco, at paragraph 12, citing Shell Canada Ltd., supra at
paragraph 45.
[42]
We must not supplant or qualify the words of
paragraph 95(6)(b) by creating “unexpressed exceptions derived from
[our] view of the object and purpose of the provision,” or by resorting to
tendentious reasoning. Otherwise, we would inject “intolerable uncertainty”
into the Act, undermining “consistency, predictability and fairness”: 65302
British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at paragraph 51,
citing P. W. Hogg and J. E. Magee, Principles of Canadian Income
Tax Law (2nd ed. 1997) at pp. 475-76; see also Canada Trustco, at
paragraph 12.
[43]
In the course of applying these principles, legislative history
and explanatory documents such as technical notes, budget papers and committee
minutes can offer assistance.
[44]
Overall, though, our task is to discern the meaning of the
provision’s text using all of the objective clues available to us.
[45]
Doing this, following the above principles, I accept the
taxpayers’ interpretation of paragraph 95(6)(b).
[46]
The words of paragraph 95(6)(b) are precise and
unequivocal. Paragraph 95(6)(b) requires us to focus on the principal purpose for the acquisition or disposition of
the shares, not the principal purpose of the series of transactions of which the
acquisition or disposition forms a part. There is no basis for this Court to
read in those extra words and, as shall be seen, good reason not to.
[47]
I note the use of the specific words “disposition” and
“acquisition” in paragraph 95(6)(b). They suggest that paragraph 95(6)(b)
is aimed at a particular species of tax avoidance. In this context,
dispositions and acquisitions, in and by themselves, can only be for the purpose
of affecting the status of a non-resident corporation.
[48]
The wider context of paragraph 95(6)(b) within the Act
also supports the taxpayers’ interpretation.
[49]
Whenever the Act broadens its focus from an individual
transaction to a series of transactions, it uses quite specific words to do so:
see, for example, subsections 55(2), 83(2.1), 129(1.2), the definition of “term
preferred share” in section 248, and section 245. This last-mentioned provision
– the general anti-avoidance rule in the Act – illustrates this well. It
provides that a transaction may be regarded as an avoidance transaction if it
is part of a “series of transactions or events” giving rise to a tax benefit.
[50]
Paragraph 95(6)(b) contains no such specific language. It
does not state that the tax benefit be identified as having resulted from a
series of transactions of which the share acquisition or disposition was a
part. Rather, the words of paragraph 95(6)(b) require that the tax
benefit must flow from the share acquisition or disposition itself and
obtaining the tax benefit must be the principal purpose of the share
acquisition or disposition.
[51]
Parliament knows very well what words to use to give effect to
the Crown’s reading of paragraph 95(6)(b). It has not done so.
[52]
Certain amendments to the Act made while paragraph 95(6)(b)
has been on the books provide another contextual clue to the meaning of
paragraph 95(6)(b): subsection 17(2) in 1999, section 18.2 in 2007, and
the debt dumping rules in 2013. These amendments addressed particular tax
avoidance techniques. If paragraph 95(6)(b) has the meaning the Crown
urges upon us – a broad anti-avoidance weapon in the hands of the Minister –
why were these amendments necessary?
[53]
Indeed, the particularity of the wording of paragraph 95(6)(b)
resembles the particularity of these amendments to the Act. Paragraph 95(6)(b)
appears to be just one of many particular anti-avoidance provisions in the Act
and should be construed as such.
[54]
Another contextual factor is the architecture of the Act.
Paragraph 95(6)(b) appears in subdivision i (“Shareholders of
Corporations Not Resident in Canada”) of Division B (“Computation of Income”)
of Part I of the Act. When paragraph 95(6)(b) is triggered, it affects
whether a particular share acquisition or disposition should be considered when
computing income. It is not in a more general part of the Act such as Part XVI
(“Tax Avoidance”). In the absence of specific wording suggesting otherwise,
this supports the conclusion that paragraph 95(6)(b) addresses concerns about
acquisitions or dispositions of “shares of corporations not resident in
Canada,” not other transactions or more general tax avoidance concerns.
[55]
On the facts of this case, the tax advantage is created by
section 113 and depends on whether the non-resident corporation has the status
of “foreign affiliate” under subsection 95(1). Taxpayers can easily manipulate
this status by acquiring or disposing of shares. Paragraph 95(6)(b)
creates a fix by requiring in appropriate cases that the acquisition or disposition
of shares be ignored. Under this interpretation, the fix fits the problem. It
would take clearer wording to lead to the conclusion that the fix in paragraph
95(6)(b) is aimed at a broader problem.
[56]
From the foregoing analysis then, it seems to me that the species
of tax avoidance addressed by paragraph 95(6)(b) is the manipulation of
share ownership of the non-resident corporation to meet or fail the relevant
tests for foreign affiliate, controlled foreign affiliate or
related-corporation status in subdivision i of Division B of Part I of the Act.
[57]
This, however, is not the end of the inquiry. Even where the
wording is clear and unequivocal and the context of the provision within the
Act supports its clear and unequivocal wording, Canada Trustco instructs
us to examine the underlying purpose of the provision in order to try to
understand its meaning.
[58]
Here, the Crown’s submissions concerning the purpose of paragraph
95(6)(b) smacked of the sort of economic realities submission advanced
in Shell, supra. On that, the Supreme Court said this (at paragraphs 39-40):
…this Court has never held that the economic realities of a
situation can be used to recharacterize a taxpayer’s bona fide
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….
Second, it is
well established in this Court’s tax jurisprudence that a searching inquiry 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 an unambiguous provision of the Act to a taxpayer’s transaction. Where
the provision at issue is clear and unambiguous, its terms must simply be
applied. [References omitted]
[59]
The Crown is right to say that paragraph 95(6)(b) has an
anti-avoidance purpose. But identifying that purpose does not take us very far.
It begs the questions of exactly what avoidance techniques are being addressed
by paragraph 95(6)(b), how far paragraph 95(6)(b) goes to redress
the avoidance of tax, and in what circumstances it applies.
[60]
Anti-avoidance provisions in the Act come in all shapes and sizes
and must be analyzed individually. For example, while section 245 is a broad
anti-avoidance provision, many others are designed narrowly to address a
particular species of avoidance. The above analysis suggests that paragraph
95(6)(b) addresses a particular species of avoidance and is not aimed at
general anti-avoidance.
[61]
As part of the Court’s examination of the purpose underlying a
provision, it is sometimes useful to consider the implications associated with
the rival interpretations placed before it. Some implications are consistent
with the broad themes of the Act and the legal principles governing its
administration. Others, not so much.
[62]
In this case, the Crown’s oral and written submissions suggest that
paragraph 95(6)(b) is capable of being applied in a variety of
circumstances where a taxpayer has engaged in what the Minister considers to be
abusive tax planning involving foreign corporations. Indeed, the Crown seems to
believe that the paragraph can be used even if the non-resident corporation has
obtained foreign affiliate status without any artificial manipulation of share
ownership.
[63]
At the same time, however, the Crown does not take the view that whenever
paragraph 95(6)(b) can be applied, it will. Rather, the Crown says that
paragraph 95(6)(b) will be applied only where the tax avoidance is
unacceptable.
[64]
Unacceptability is in the eye of the beholder. It can shift
depending on one’s subjective judgment and mood at the time. Using it, as the
Crown suggests, to restrain the indiscriminate use of paragraph 95(6)(b)
creates the spectre of similarly-situated taxpayers being treated differently
for no objective reason. This would violate the principle that, absent clear
legislative wording, the same legal principles should apply to
all taxpayers: Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32 at page
46.
[65]
A hypothetical but commonly-occurring scenario illustrates this problem.
Where a Canadian taxpayer borrows to buy shares in a non-resident subsidiary
corporation that carries on an active business, the tax result will always
exceed the commercial result. The Canadian taxpayer will be able to deduct
interest on the loan and deduct the dividends. As a practical matter, the tax
advantages of borrowing to buy shares in a non-resident corporation often enter
into the taxpayer’s decision-making.
[66]
In that scenario, will paragraph 95(6)(b) always be a live
issue? What would govern the Minister’s discretion whether or not to apply
paragraph 95(6)(b)? Unlike section 245, where there is an express limiting
factor on the Minister’s discretion – the presence of abuse or misuse –
paragraph 95(6)(b) does not contain any sort of limiting factor at all. A
standard of unacceptability, even if it were open to us to invent it and insert
it into paragraph 95(6)(b), is in itself unacceptable, as I have
explained.
[67]
Absent clear wording, I would be loath to interpret paragraph
95(6)(b) in a way that gives the Minister such a broad and ill-defined
discretion – a standardless sweep – as to
whether or not a tax is owing, limited only by her view of unacceptability. It would
be contrary to fundamental principle. It would also promote arbitrary
application, the bane of consistency, predictability and
fairness.
C. Conclusion and application to the facts of this
case
[68]
For the foregoing reasons, I conclude that paragraph 95(6)(b)
is targeted at those whose principal purpose for acquiring or disposing of shares
in a non-resident corporation is to meet or fail the relevant tests for foreign
affiliate, controlled foreign affiliate or related-corporation status in
subdivision i of Division B of Part I of the Act with a view to avoiding,
reducing or deferring Canadian tax.
[69]
The principal purpose of the acquisition or disposition of shares
in the non-resident corporation is
a question of fact to be determined on the basis of all relevant circumstances.
An entire series of transactions may form part of the
circumstances relevant to discerning the principal purpose of the acquisition
or disposition of shares in the non-resident corporation. But it is not open to
the Minister to look at an entire series of
transactions to discern a tax avoidance purpose that is not the specific target
of paragraph 95(6)(b).
[70]
Manipulating the shareholdings in the non-resident corporation to
change its status in subdivision i of Division B of Part I of the Act in order
to avoid, reduce or defer Canadian tax by itself does not necessarily trigger
paragraph 95(6)(b) of the Act. The purpose must be the principal – i.e.
dominant or main purpose – not just one of many different purposes.
[71]
In this case, the Tax Court found that the principal purpose
behind the acquisition of shares in the non-resident
corporation, NAM LLC, viewed in light of the entire series of
transactions, was to achieve overall U.S. tax savings. Further, the Tax
Court found that the Canadian tax savings could have been obtained without acquiring
the shares in the non-resident corporation.
[72]
On the basis of these considerations and the record of evidence
before it, the Tax Court concluded that the taxpayers’ acquisition of shares in
the non-resident corporation did not result in an avoidance of Canadian tax. In
substance, the Tax Court rejected the submission that the taxpayers’ principal
purpose was to manipulate share ownership of the non-resident corporation to
meet the test for “foreign affiliate” in subdivision i of Division B of Part I
of the Act and gain a Canadian tax benefit.
[73]
In reaching these conclusions, the Tax Court did not err in
principle. Further, these conclusions were open on the record before it. This
Court has no ground to intervene.
[74]
It follows that paragraph 95(6)(b) does not apply in this
case. Therefore, I agree with the result reached by the Tax Court – the
Minister’s reassessments for the 1996 and 1997 taxation years
cannot stand.
D. Proposed disposition
[75]
For the foregoing reasons, I would
dismiss the appeals with costs.
"David Stratas"
“I agree
Pierre Blais C.J.”
“I agree
K. Sharlow J.A.”
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