Date: 20010219
Docket: 98-2383-IT-G
BETWEEN:
DENNIS GERANSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1]
These appeals are from assessments for the appellant's 1994
and 1995 taxation years. In 1994 transactions were entered into
by the appellant and his brother Harvey involving three
corporations controlled by them. The Minister assessed them on
two alternative bases:
(a)
that they had received a deemed dividend under
subsection 84(2);
or
(b)
that the transactions were avoidance transactions within the
meaning of section 245 of the Income Tax Act
justifying the Minister's recharacterization of the capital
gain realized by the appellant as a dividend.
[2]
The important year under appeal is 1994, the parties having
agreed that the assessment for 1995 is consequential upon the
disposition of the 1994 assessment.
[3]
The parties entered into a detailed agreement as to facts and as
well four witnesses testified: Mr. Dennis Geransky,
Mr. George Knight, the company's accountant,
Mr. Gregory Sherloski, a tax partner with the accounting
firm Ernst & Young, and Mr. Robert Kelln, an assessor
with the Tax Avoidance Section of Revenue Canada (now CCRA).
[4] I
shall not reproduce the lengthy agreement as to facts. It is
sufficient for these purposes to summarize the facts that
culminated in the assessments under appeal.
[5]
Geransky Brothers Construction Ltd. ("GBC") was
incorporated in 1978 and has carried on the concrete construction
business in the Saskatoon area, principally in the field of
foundations for commercial buildings.
[6]
In 1982 Geransky Holdings Ltd. ("GH") was formed and
the shares of GBC were rolled into it so that GBC became the
wholly owned subsidiary of GH, whose sole function was to hold
the shares of GBC. The original shareholders of GH, the brothers
Edward, Irvin and Dennis Geransky, changed in 1983 so that the
only shareholders of GH were the brothers Dennis and Harvey
Geransky. Each owned 50 Class A Common Voting shares of
GH. Also, Dennis held 100 Non-Voting Preferred shares of
GH.
[7]
In 1987 the Geranskys decided that it made economic sense for GBC
to stop getting its supply of concrete from outside sources such
as Inland Cement Limited which took over Revelstoke Cement.
Evidently at that time the price of cement was high. Therefore
GBC constructed its own cement plant where cement was
manufactured. About 2/3 of the cement manufactured was used in
GBC's construction business and 1/3 was sold to outsiders.
The proportion of concrete sales to revenues from construction
contracts was lower than this in the fiscal periods ending
March 31, 1994 and 1995. Also, about 1/3 of the gross
revenue from construction contracts was attributable to the
concrete manufactured by GBC and supplied under the construction
contracts.
[8]
There was no separation or segregation of either the staff or the
assets employed or used in the construction contracts or the
cement manufacturing aspects of the business. No separate CCA
pools were created in respect of assets used in construction as
opposed to cement manufacturing. GBC treated the two aspects as
one business, not two, and I agree. Concrete manufacturing was
simply a part of the concrete construction business.
[9]
In 1991 Lafarge Canada Inc. ("Lafarge"), a large
manufacturer of cement and supplier of concrete to the
construction industry, approached the appellant and asked if GBC
would be interested in selling the cement plant and related
redi-mix assets. Nothing came of this overture at that
time. However by 1992 the concrete market began to shrink and the
price of concrete started to fall. In 1987 the price of standard
strength concrete was $100-$110 per cubic metre. By 1992 or 1993
the price had fallen to less than $70 per cubic metre.
[10] Dennis
and his brother Harvey decided that it was no longer economic for
GBC to manufacture its own cement. It made more economic sense to
buy from outsiders, such as Lafarge. They therefore approached
Lafarge and a price and an agreement in principle was reached,
essentially that Lafarge would acquire GBC's cement plant and
related assets and give GBC a 10-year supply contract. At this
point nothing binding was concluded.
[11] Dennis
realized that tax consequences were involved. He spoke to his
accountant, Mr. Knight. Mr. Knight did not consider
himself a tax expert and he consulted Mr. Gregory Sherloski,
a tax partner at Ernst & Young, who developed a plan
contained essentially in a memorandum that was adduced in
evidence as Exhibit A-10.
[12] It reads
as follows:
Geransky Reorganization and Sale
The following is a very brief summary of the steps involved in
the proposed reorganization:
h
Construction pays $1 million dollar dividend-in-kind to Holdings.
Dividend-in-kind is paid by transferring $1 million of assets
which Lafarge wishes to purchase from Construction.
i
Dennis and Harvey each transfer $500,000 of Holdings' common
shares to Newco in exchange for Newco common shares. Dennis and
Harvey will crystallize their capital gains exemptions as part of
this transaction and will each have an adjusted cost base of
$500,000 in the Newco common shares acquired. Newco will now own
$1 million of Holdings common shares.
i
Holdings redeems its common shares held by Newco by transferring
the $1 million of assets it received from Construction as a
dividend-in-kind. Holdings is now again owned 50/50 by Dennis and
Harvey. Newco is also owned 50/50 by Dennis and Harvey. Newco
will have to pay some tax on this dividend. Tax owing will depend
on Holdings' safe income. These calculations are yet to be
finalized.
i
Dennis and Harvey sell their interest in Newco to Lafarge for $1
million. Lafarge now owns Newco and its $1 million of assets.
i
Lafarge purchases the remaining $200,000 of assets from
Construction.
i
Lafarge and Newco amalgamate or Newco is wound into Lafarge.
i
Newco is deemed to have a tax year-end when Lafarge acquires its
shares and must file a tax return for the period then ended.
i
If Newco and Lafarge amalgamate, both companies will have a tax
year-end at that time. Alternatively, if Newco is wound-up into
Lafarge, only Newco will have a tax year-end at that time. The
timing of the wind-up or amalgamation should be structured so as
to minimize the number of tax filings required.
[13] The steps
taken to implement the plan were as follows.
1.
On or about February 15, 1994 the appellant and his brother
each sold 40 Class A shares of GH to 606103
Saskatchewan Ltd. ("606103"). I do not recall whether
606103 was formed for this purpose or was an existing company. It
is immaterial. At the time it held only the shares of GH.
The consideration for the 40 shares of GH sold by each of
the brothers was $500,000 payable by the issuance to each brother
of 100 Class A Common Voting shares of 606103. This was
considered to be fair market value. This value has not been
challenged by the respondent.
2.
On or about February 21, 1994 an agreement was entered into
between Harvey and Dennis Geransky, GH, GBC, 606103 and Lafarge
under which Lafarge agreed to buy from each of Dennis and Harvey
Geransky 100 Class A Shares of 606103 for $477,450 and
shareholders' loans owing to each of them by 606103 in the
amount of $22,550. Lafarge also agreed to buy from GBC land and a
maintenance shop for $200,000.
3.
At 9:00 a.m. on April 4, 1994 GBC declared and paid a
dividend of $1,000,000 in favour of GH. The dividend was a
dividend in kind paid by the transfer of assets. These assets
were the cement plant and related property, a portable plant and
a number of vehicles, primarily cement mixer trucks.
The value of the property transferred by way of dividend,
$1,000,000, was not challenged.
4.
Between 10:00 a.m. and noon on April 4, 1994 GH bought
back from 606103 the 80 Class A shares of its capital
stock for $1,000,000. The $1,000,000 consideration was satisfied
by the transfer to 606103 of the property GH had received from
GBC on the payment of the $1,000,000 dividend.
5.
Later that day the agreement of February 21, 1994 referred
to in 2 above closed and the two Geransky brothers each sold
their 100 Class A Common Voting shares of 606103 to
Lafarge for $477,550, and their shareholders' loans for
$22,550. Also, GBC sold its land and maintenance shop to Lafarge
for $200,000.
[14] This
completes the summary of the transactions. They had the following
tax consequences apart from those resulting from the
Minister's application of subsection 84(2) and
section 245.
(a)
The appellant realized a capital gain of $499,960 on the
disposition of the 40 Class A Common shares of GH
($500,000 proceeds less an ACB of $40).
(b)
The appellant sustained a capital loss of $22,550 on the sale of
the 100 Class A Common shares of 606103 (proceeds of
$477,450 less ACB of $500,000).
(c)
The appellant sustained a capital loss of $425 on the disposition
of the shareholder's loan of $22,975 owing to him by
606103.
(d)
The appellant claimed $281,302.92 in respect of a capital gains
deduction and $1,612.50 as net capital losses from previous
years.
(e)
In its fiscal year commencing April 1, 1994 and ending
March 31, 1995 GBC included recapture of CCA of $517,337
under subsection 13(1) of the Income Tax Act. This
resulted in whole or in part from the disposition of the property
in the form of a dividend to GH in the amount of $1,000,000 and
the sale to Lafarge of the land and maintenance shop for
$200,000.
(f)
The appellant's employment income went from $95,100 in 1994
to $183,157 in 1995.
(g)
The repurchase for $1,000,000 by GH of the 80 Class A
shares in its capital stock held by 606103 would, apart from
section 55, have resulted in a deemed dividend under
subsection 84(3) to the extent that the amount paid exceeded
the paid-up capital.
Section 55 however converts what would otherwise be a tax free
inter-corporate dividend to a capital gain to the extent
that the dividend does not effect a reduction in a capital gain
that is attributable to post 1971 income ("safe
income"). The rules under section 55 are complex and
need not concern us here. It is sufficient to say that the
evidence is that GH did not have sufficient safe income and as a
result a capital gain was realized in the amount of $133,000.
This amount is not disputed.
[15] Before
turning to the two bases upon which the assessments were
predicated, I should state several conclusions that I regard as
being of some significance.
(a)
The transactions in the series were legally binding and
effective. They were not shams.
(b)
The overall economic purpose was the acquisition by Lafarge of
the cement manufacturing assets of GBC and the obtaining by GBC
of a 10-year supply contract from Lafarge. That purpose was
formulated by the appellant and his brother in negotiations with
Lafarge. Tax or the saving of tax played no role in those
negotiations.
(c)
The development of a plan to implement the economic purpose
referred to in (b) in the most tax effective way occurred after
the consultation with Mr. Knight and Mr. Sherloski.
(d)
Each of the tax consequences recognized and anticipated by the
appellant and his advisors — whether favourable or adverse
— were the result of the application of specific provisions
of the Income Tax Act.
[16] The first
assessing position is that the series of steps taken by the
appellant and the three companies — GH, GBC and 606103
— resulted in a deemed dividend under subsection 84(2)
of the Income Tax Act which reads:
Where funds or property of a corporation resident in Canada have
at any time after March 31, 1977 been distributed or otherwise
appropriated in any manner whatever to or for the benefit of the
shareholders of any class of shares in its capital stock, on the
winding-up, discontinuance or reorganization of its business, the
corporation shall be deemed to have paid at that time a dividend
on the shares of that class equal to the amount, if any, by
which
(a)
the amount or value of the funds or property distributed or
appropriated, as the case may be,
exceeds
(b)
the amount, if any, by which the paid-up capital in respect of he
shares of that class is reduced on the distribution or
appropriation, as the case may be,
and a dividend shall be deemed to have been received at that
time by each person who held any of the issued shares at that
time equal to that proportion of the amount of the excess that
the number of the shares of that class held by the person
immediately before that time is of the number of the issued
shares of that class outstanding immediately before that
time.
[17] Counsel
for the respondent did not rely upon the words
"winding-up" or "discontinuance". Rather, his
position was that funds or property of a corporation resident in
Canada had been appropriated in any manner whatever to or for the
benefit of the appellant on the reorganization of its
business.
[18] In
Smythe et al. v. Minister of National Revenue, [1970]
S.C.R. 64, Judson J. characterized a somewhat complex
surplus strip as a "winding up". Smythe was
followed in RMM Canadian Enterprises Inc. et al. v. R.,
[1998] 1 C.T.C. 2300.
[19] Both
these cases involve a strip of surplus of a corporation. In both
cases there was a corporation with a substantial surplus and the
steps involved the use of another corporation as a means of
getting the surplus into the hands of the shareholders. In
RMM at pages 2313-4 this court said:
18
What of the fact that there was a sale of shares? Of course there
was sale. It was not a sham. "Sale of shares" is a
precise description of the legal relationship. Nor do I suggest
that the doctrine of "substance over form" should
dictate that I ignore the sale in favour of some other legal
relationship. That is not what the doctrine is all about. Rather
it is that the essential nature of a transaction cannot be
altered for income tax purposes by calling it by a different
name. It is the true legal relationship, not the nomenclature
that governs. The Minister, conversely, may not say to the
taxpayer "You used one legal structure but you achieved the
same economic result as that which you would have had if you used
a different one. Therefore I shall ignore the structure you used
and treat you as if you had used the other one".
19
One cannot deny or ignore the sale. Rather, one must put it in
its proper perspective in the transaction as a whole. The sale of
EL's shares and the winding-up or discontinuance of its
business are not mutually exclusive. Rather they complement one
another. The sale was merely an aspect of the transaction
described in subsection 84(2) that gives rise to the deemed
dividend. The flaw in the appellant's position and, I should
think, in the assessor's view that he had to go through
section 245 to get to section 84, is that it is predicated
upon an either/or hypothesis: either the amounts received are the
proceeds of the sale of the shares of EL or they represent a
distribution or appropriation of funds or property of EL on the
winding-up or discontinuance of EL's business and the two
cannot co-exist. Indeed they can, and they did. I do not think
that the brief detour of the funds through RMM stamps them with a
different character from that which they had as funds of EL
distributed or appropriated to or for the benefit of EC. Nor do I
think that the fact that the funds that were paid to EC by RMM
were borrowed from the bank and then immediately repaid out of
EL's money is a sufficient basis for ignoring the words
"in any manner whatever". In Minister of National
Revenue v. Merritt, [1941] Ex. C.R. 175 (Can. Ex. Ct.),
Maclean P. said at p. 182:
I therefore think there is no room for any dispute of
substance but that the Security Company discontinued its business
in a real and commercial sense, and that for a consideration it
disposed of all its property and assets, however far that my
carry one in deciding the issues in this case. There is,
therefore, no necessity for attempting any precise definition of
the words "winding-up, discontinuance or
reorganization." What was done with the business of the
Security Company fell somewhere within the meaning and spirit of
those words. Neither do I entertain any doubt that there was a
distribution of the property of the Security Company among its
shareholders, in the sense contemplated by s. 19(1) of the Act,
under the terms of the Agreement after its ratification by the
shareholders of the Security Company. It is immaterial, in my
opinion, that the consideration received by the appellant for her
shares happened to reach her directly from the Premier Company
and not through the medium of the Security Company.
20
In the Supreme Court of Canada ([1942] S.C.R. 269 (S.C.C.)) the
majority of the court at p. 274 agreed with this statement but
reversed the Exchequer Court on other grounds.
[20] Let us
then apply the reasoning in these cases to the present case and
see where it gets us. Subsection 84(2) is a reasonably broad
section that permits the type of conclusion that we find in
Smythe, RMM and Merritt. Nonetheless, I do
not think that one can contort it beyond all recognition.
[21]
(a)
There was no discontinuance, wind-up or reorganization of any
company's business. Both GH and GBC continue to this day to
do what they have always done.
(b)
The appellant is a shareholder of GH, not of GBC. GH's
"business" (if that is an appropriate term considering
that it is a passive holding company) is the holding of the
shares of GBC. Even if one regards the taxable event as the
"reorganization" of GBC's business because it
disposed of some assets that can hardly bear on the appellant who
is not a shareholder of GBC.
(c) I
asked counsel for the respondent what corporation we were talking
about in subsection 84(2) and he said both GH and GBC.
Leaving aside the fact that the appellant was not a shareholder
of GBC I do not see where any funds or property of either company
ended up in the appellant's hands. The appellant sold 40 of
his Class A shares of GH to 606103 for $500,000. This
triggered a capital gain. If one stops there it is impossible to
see how any funds or property of any corporation have been
appropriated to the appellant. The next steps — the
dividend by GBC and the repurchase of its shares by GH from
606103 — do not involve any funds or property ending up in
the appellant's hands. Finally, the sale of the shares of
606103 by the appellant did not result in any funds or property
of GH or GBC ending up in the appellant's hands. He sold his
shares of 606103 to Lafarge and was paid by Lafarge out of its
own funds. Lafarge was no accommodation company of the type used
in Smythe or RMM where the payment was made
essentially by using the funds of the very company whose surplus
was being stripped. Lafarge wanted the assets and it paid for
them, packaged in 606103.
[22] I am
aware that there have been some developments in the rules of
construction relating to taxing statutes and I tried to summarize
my understanding of them in Glaxo Wellcome Inc. v. The
Queen, 96 DTC 1159 aff'd 98 DTC 6638
(F.C.A.). Leave to appeal to S.C.C. was denied.
[23]
Nonetheless, no matter how liberal, broad or purposive an
approach one takes to the construction of subsection 84(2) I
do not see how the transactions in this case individually or
cumulatively come even close to being caught by that
provision.
[24] The
secondary position of the respondent is section 245 of the
Income Tax Act, the general anti-avoidance rule, or
GAAR.
[25] GAAR is a
measure of last resort invoked to counteract tax avoidance
transactions that are otherwise successful. If a tax avoidance
scheme does not work independently of GAAR there is no need to
invoke GAAR.
[26] I begin
the analysis of this aspect of the case by setting out the
position of the Crown as expressed in the letter dated
April 24, 1998 from the assessor, Mr. Kelln, to the
appellant.
B. Secondary Reassessment Position
Pursuant to Paragraph 245(2)(c) of the Income Tax Act, the
proceeds received by Dennis in 1994 on the disposition of the 40
Class A Common Shares of GH LTD. will be recharacterized as a
dividend rather than a capital gain. The Tax Benefit, Avoidance
Transaction(s), Misuse Or Abuse, and Tax Consequences have been
outlined below for your convenience.
Tax Benefit
The tax benefit is the indirect extraction of $500,000 by
Dennis from GBC LTD. without any tax consequences.
Avoidance Transaction(s)
Lafarge wanted to buy assets of GBC LTD. Rather than a
straight forward sale, a number of transactions were interposed
for the tax advantage of Harvey and Dennis Geransky. In the
Department's view, those interposed transactions are
avoidance transactions. They include:
1.
The incorporation of 606103;
2.
The rollover of common shares from GH LTD. to 606103 by Harvey
and Dennis;
3.
The transfer of assets (concrete) from GBC LTD. to GH LTD. by way
of dividend;
4.
The transfer of assets (concrete) to 606103 on the redemption of
shares;
5.
The sale of the shares of 606103 by Harvey and Dennis.
As a result of these transactions, GBC LTD. has disposed of
certain of its assets (concrete) to Lafarge and Harvey and Dennis
have received the proceeds without having to pay any tax on the
receipt of these funds.
Misuse or abuse
Provisions such as Sections 84, 84.1, and 212.1 indicate the
circumstances in which amounts received by a shareholder of a
corporation from a corporation on a disposition of shares or
other property are to be accounted for as a dividend. This is
referred to in Paragraph 25 of Information Circular 88-2 which
also refers to former Subsection 247(1) of the Act which the
General Anti-Avoidance Rule ("GAAR") was meant to
replace.
The taxpayers also arranged their transactions to ensure that
their arm's-length sale of the shares of 606103 would not
result in a capital gain in order to avoid the consequences of
Subsection 110.6(7) and/or paragraph 110.6(14)(f) (the 24 month
holding period). While a taxpayer is permitted to crystallize a
capital gain, no non-share consideration should be received that
exceeds the less of Paid Up Capital ("PUC") or Adjusted
Cost Base ("ACB").
The taxpayers have undertaken their transactions in a manner
that allows them to crystallize their capital gains and also
receive non-share consideration in excess of the less of ACB or
PUC without having disposed of their direct and indirect interest
in GH LTD., or GBC LTD. It is our view that this result is
abusive based on the provisions of the Act read as a whole.
Tax Consequences
Pursuant to Paragraph 245(2)(c) of the Income Tax Act, the
proceeds received by Dennis in 1994 of the disposition of the 40
Class A Common Shares of GH LTD., will be recharacterized as a
dividend rather than a capital gain.
[27] I start
from the premise that the court should confine its consideration
of section 245 to the facts of this case. As I said in
RMM the jurisprudence under section 245 should
develop on a case by case basis. Wide-ranging commentaries on
matters not before the court only muddy the waters.
[28] What we
have here is a purely commercial transaction conceived by
business persons without any particular tax motivation and
carried out with the assistance of tax professionals in a manner
that is designed to achieve that result with the least
unfavourable tax consequences.
[29] This,
according to the respondent, is an avoidance transaction.
[30] Avoidance
transaction is defined in subsection 245(3):
An avoidance transaction means any transaction
(a)
that, but for this section, would result, directly or indirectly,
in a tax benefit, unless the transaction may reasonably be
considered to have been undertaken or arranged primarily for
bona fide purposes other than to obtain the tax benefit;
or
(b)
that is part of a series of transactions, which series, but for
this section, would result, directly or indirectly, in a tax
benefit, unless the transaction may reasonably be considered to
have been undertaken or arranged primarily for bona fide
purposes other than to obtain the tax benefit.
[31] Tax
benefit is defined in subsection 245(1):
"tax benefit" means a reduction, avoidance or
deferral of tax or other amount payable under this Act or an
increase in a refund of tax or other amount under this Act.
[32] On the
basis that the appellant had obtained a tax benefit in the
carrying out of an avoidance transaction the Minister applied
subsection 245(2) which reads:
Where a transaction is an avoidance transaction, the tax
consequences to a person shall be determined as is reasonable in
the circumstances in order to deny a tax benefit that, but for
this section, would result, directly or indirectly, from that
transaction or from a series of transactions that includes that
transaction.
[33] He
therefore treated the capital gain as a dividend. I note that he
took the first transaction — the sale of the shares of GH
to 606103 — and recharacterized it. He seemed content to
take all of the other subsequent transactions at their face value
and use them to justify his treatment of the first transaction as
an avoidance transaction without a consequential
recharacterization of the tax consequences of the other
transactions.
[34] The
operation of subsection 245(2) is excluded by
subsection 245(4):
For greater certainty, subsection (2) does not apply to a
transaction where it may reasonably be considered that the
transaction would not result directly or indirectly in a misuse
of the provisions of this Act or an abuse having regard to the
provisions of this Act, other than this section, read as
whole.
[35] The
statement by the assessor that
The tax benefit is the indirect extraction of $500,000 by
Dennis from GBC LTD. without any tax consequences.
is wrong on several counts.
(a)
He did not extract $500,000 from GBC at all. He sold shares of
606103 to Lafarge for $477,450.
(b)
To say that there were no tax consequences from the various
transactions is fanciful:
(i)
the capital gain on the sale of the shares of GH to 606103 was
only partially sheltered by the appellant's capital gains
deduction;
(ii)
the payment of the dividend in kind by GBC to GH had significant
tax consequences in the form of recapture of CCA;
(iii)
the repurchase of its shares by GH from 606103 gave rise to a
capital gain under section 55;
(iv) the
additional salary paid to the appellant by GBC may have been
attributable to an attempt to reduce GBC's additional income
but it would have been taxable in the appellant's hands at
the highest individual rates.
[36] The Crown
in my view has gotten the cart before the horse. It conceives the
primary commercial objective of disposing of the cement
manufacturing assets to Lafarge as subordinate to the means of
achieving that end in a manner that is tax effective.
[37] I do not
think these transactions are avoidance transactions because I
think that they may reasonably (indeed, unquestionably) be
considered to have been undertaken or arranged primarily for
bona fide purposes other than to obtain the tax
benefit.
[38] As was
said in Jabs Construction Limited v. The Queen,
99 DTC 729:
[48] ...
Section 245 is an extreme sanction. It should not be used
routinely every time the Minister gets upset just because a
taxpayer structures a transaction in a tax effective way, or does
not structure it in a matter that maximizes the tax.
[39] In
Canadian Pacific Limited v. The Queen,
2000 DTC 2428, Bonner J. said:
[15] ...
The transactions which the Respondent says constitute the series
were, when viewed objectively, inextricably linked as elements of
a process primarily intended to produce the borrowed capital
which the Appellant required for business purposes. The capital
was produced and it was so used. No transaction forming part of
the series can be viewed as having been arranged for a purpose
which differs from the overall purpose of the series. The
evidence simply does not support the Respondent's position.
Accordingly none of the transactions on which the Respondent
relies was an avoidance transaction within the meaning of
s. 245(3).
[40] There is
a further reason why section 245 does not apply, quite apart
from the fact that the transactions are not avoidance
transactions because their primary purpose is the achievement of
a bona fide non-tax objective. Subsection 245(4)
excludes from the operation of subsection 245(2)
transactions that do not result "directly or indirectly in a
misuse of the provisions of this Act or an abuse having
regard to the provisions of this Act, other than this
section, read as a whole." What is a misuse or an abuse is
in some measure in the eye of the beholder. The Minister seems to
be of the view that any use of a provision is a misuse or an
abuse if the provision is not used in a manner that maximizes the
tax resulting from the transaction. Here I suppose the least tax
effective way of going about the transaction would have been for
GBC to sell the assets directly to Lafarge, pay a dividend to GH
which could then pay a dividend to the Geransky brothers. I see
no reason whatever why a taxpayer is obliged to follow that
route.
[41] What
provision is being misused? What abuse is committed? Let us look
at the sections that are involved here.
(a)
Section 110.6 provides for the capital gains deduction.
Where a capital gain is realized it is neither a misuse nor an
abuse to claim the deduction. As Mr. Beaubier pointed out
section 110.6 contains its own anti-avoidance mechanism.
(b)
Section 55 is itself an anti-avoidance section. As it
happens, it applied to the repurchase by GH of its shares. By
paying the tax on this deemed capital gain under that section it
is impossible to see how it is being abused.[1]
(c)
Section 13 resulted in recapture of CCA. This is hardly an
abuse or a misuse.
[42] 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".
[43] That is
not what GAAR is all about.
[44] The
appeals are allowed with costs and the assessments for 1994 and
1995 are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that neither
subsection 84(2) nor section 245 of the Income Tax
Act applies to the transactions in issue.
Signed at Ottawa, Canada, this 19th day of February 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
98-2383(IT)G
STYLE OF
CAUSE:
Between Dennis Geransky and
Her Majesty The Queen
PLACE OF
HEARING:
Saskatoon, Saskatchewan
DATE OF
HEARING:
February 5 and 6, 2001
REASONS FOR JUDGMENT
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
February 19, 2001
APPEARANCES:
Counsel for the
Appellant:
Beaty Beaubier, Esq.
Counsel for the
Respondent:
Robert Gosman, Esq.
COUNSEL OF RECORD:
For the
Appellant:
Name:
Beaty Beaubier, Esq.
Firm:
Priel, Stevenson, Hood & Thornton
Saskatoon, Saskatchewan
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
98-2383(IT)G
BETWEEN:
DENNIS GERANSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on February 5 and 6, 2001,
at Saskatoon, Saskatchewan, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Counsel for the
Appellant: Beaty
Beaubier, Esq.
Counsel for the Respondent: Robert
Gosman, Esq.
JUDGMENT
It is
ordered that the appeals from assessments made under the
Income Tax Act for the 1994 and 1995 taxation years be
allowed and the assessments be referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that neither subsection 84(2) nor section 245 of
the Act applies to the transactions in issue.
Signed at Ottawa, Canada, this 19th day of February 2001.
A.C.J.
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