Date: 20121030
Docket: A-445-11
Citation: 2012 FCA 272
CORAM: NADON
J.A.
GAUTHIER J.A.
MAINVILLE
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
GLOBAL EQUITY FUND
LTD.
Respondent
REASONS FOR JUDGMENT
MAINVILLE J.A.
[1]
This
is an appeal by Her Majesty the Queen (the “Crown”) from a judgment of Woods J.
of the Tax Court of Canada (the “Tax Court judge”), cited as 2011 TCC 507, allowing
the appeal of Global Equity Fund Ltd. (“Global”) with respect to reassessments for
the 1999, 2000 and 2001 taxation years issued by the Minister of National
Revenue (the “Minister”). The Minister, relying on the general anti-avoidance
rule (the “GAAR”) set out in section 245 of the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.) (the “Act”), had disallowed a business loss
in the amount of $5,600,194 claimed by Global following the disposition of
shares it held in 953565 Alberta Ltd. That loss arose from the implementation
of a planning technique known in the tax community as a “value shift”.
[2]
For
the reasons set out below, I would allow this appeal and restore the Minister’s
assessments under the GAAR.
Background facts
[3]
The
facts are fully set out in the decision of the Tax Court judge and need not be
repeated. It suffices for the purposes of this appeal to set out the following
summary. Some of the provisions of the Act which are relevant appear in an
annex to these reasons.
[4]
Global
was incorporated in 1999 for the purpose of investing in credit facilities and
private placements. Its sole shareholder is a trust whose beneficiaries include
Mr. Riaz Mamdani, his spouse, their children, grandchildren, parents, siblings,
nieces and nephews. At the time the concerned transactions were entered into,
Mr. Mamdani and his wife had two very young children.
[5]
At
some point, Mr. Mamdani sought professional advice to implement strategies for
Global in order to defer tax. A plan for this purpose was developed and implemented
just prior to September 30, 2001, which was Global’s taxation year end. The
plan may be summarized as follows:
a. a new corporation,
953565 Alberta Ltd. (“Newco”) was incorporated;
b. a new trust was set up
whose beneficiaries were Mr. Mamdani’s children and grandchildren (the
“Children’s Trust”);
c. Global subscribed to common
shares of Newco for a consideration of $5,600,250;
d. Newco declared a
dividend on the common shares held by Global in the form of non-voting preferred
shares which were redeemable and retractable for $5,600,250 and which had a
paid-up capital of $56;
e. Newco issued additional
common shares to Global for a consideration of $200,000; however, it was acknowledged
in the Tax Court that this step was inserted as window dressing in order to give
the common shares some value;
f. Global sold all the
common shares it held in Newco to the Children’s Trust for a consideration of
$200,000; it was as a result of this sale that Global claimed a loss of $5,600,194;
g. a loan was made by
Newco to Global for $5,600,000; the loan bore interest at prime plus 2% and the
loan agreement provided for an equity participation of 25% of the increase in
fair market value of Global’s assets while any part of the loan remained
outstanding; an amendment to the loan agreement was made a few months later
which deleted the interest and increased the equity participation to 50%;
h. Global granted an
interest in its property to Newco to secure the loan.
[6]
At
the time the plan was implemented, it was contemplated that the loss resulting
from the sale of the common shares of Newco to the Children’s Trust might be a
business loss for tax purposes since Global itself was involved in the business
of trading securities. Consequently, in the income statement and balance sheet
filed with Global’s corporate tax return for 2001, the transactions were
reported as increasing its losses from operations. $56 was recorded as revenue
from the stock dividend, and the subscription price for the common shares of
Newco was deducted as part of the cost of sales. The overall result was that
Global claimed a net business loss of $5,600,194. The claimed loss gave rise to
a significant tax benefit through the elimination, or near elimination, of tax
payable under the Act for Global’s 2001, 2000 and 1999 taxation years.
[7]
Pursuant
to notices of reassessment dated April 11, 2005, the Minister, applying the
GAAR, reassessed Global to deny this loss in its 2001 taxation year and the
carry-back of the loss from the 2001 taxation year to the 1999 and 2000
taxation years. Global appealed to the Tax Court of Canada.
The decision of the Tax Court of
Canada
[8]
The
Tax Court judge allowed the appeal on the GAAR issue even though she found that
the transactions were “highly artificial” and that the loss resulted “from a
shuffle of paper” by which “no real economic loss was suffered” (reasons of the
Tax Court judge at para. 4). She also noted that she may well have upheld the
reassessments under the GAAR had the Crown raised different arguments (ibid.
at para. 9).
[9]
Since
it was conceded that the transactions gave rise to a tax benefit, the issues
before the Tax Court judge were whether the transactions were “avoidance
transactions” within the meaning of the GAAR and whether there was a misuse or
abuse of the provisions of the Act relied upon to achieve the tax benefit that triggered
the GAAR.
[10]
The
Tax Court judge found that the transactions were “avoidance transactions”, notwithstanding
Global’s submissions that they were entered into for the purpose of creditor
protection (ibid. at paras. 61, 62 and 76). This finding is not
challenged in this appeal. In any event, there was abundant and cogent evidence
before the Tax Court judge for her to reach such a finding.
[11]
The
Tax Court judge also found that the transactions did not result, directly or
indirectly, in a misuse or abuse of any provisions of the Act under the meaning
of subsection 245(4). It is this conclusion which the Crown challenges in this
appeal.
[12]
The
Tax Court judge noted that in the GAAR analysis required to conclude a misuse
or abuse of any provision of the Act, the first task is to interpret the
provision giving rise to the tax benefit to determine its object, spirit or
purpose. The judge noted that the burden of this task is placed on the Crown.
She found that the Crown had not satisfied its burden with respect to this
element of the GAAR (reasons of the Tax Court judge at paras. 85 to 88).
[13]
Global
relied on sections 3, 4, 9 and 111 of the Act to achieve the tax benefit. The
Crown did not take issue with this (ibid. at para. 87). The Crown’s
position was not to allege that any specific provision of the Act had been
misused or abused, but rather that the transactions resulted in an abuse having
regard to the Act as a whole. The Crown’s position is set out in detail at paragraphs
89, 90 and 91 of the Tax Court judge’s reasons, and the following extract from
the Crown’s argument (reproduced at para. 89 of the Tax Court judge’s reasons)
summarizes that position:
The minister has not alleged that a specific
provision has been misused in this arrangement. Rather, the transactions in the
Series of Transactions resulted directly or indirectly in an abuse having
regard to the provisions of the Act read as a whole, all within the meaning of
subsection 245(4) of the Act. The Minister argues that the object and purpose
of the provisions of the Act read as a whole is to permit only bona fide losses
as deductions from income or capital gains.
[14]
The
Tax Court judge held that the Crown had failed to establish that the object, spirit
or purpose of the Act was to restrict business losses to real losses realized
outside of an economic unit, as had been submitted to her. The Tax Court judge reached
that conclusion following an analysis found in paragraphs 90 to 100 of her
reasons, which I reproduce here for ease of reference:
[90]
It is important to note that the Crown does not
allege that any of the provisions relied on for the tax benefit (s. 3, 4, 9,
111) have been misused. Section 9 appears to be a key provision relied on by
Global as it brings in commercial principles in calculating income and loss.
The Crown acknowledges that this provision, read alone, permits the deduction
of the loss claimed by Global.
[91]
The essence of the Crown’s argument is that the
object and spirit of the provisions relied upon by Global are influenced by
other provisions in the Act. These provisions all restrict the deduction
of losses in one way or another. It is submitted that, as a result of these
other provisions, the object and spirit of the provisions relied on is
disclosed. As a result, only real losses realized outside the economic unit may
be deducted.
[92]
The problem that I have with the Crown’s argument is
that the provisions referred to by the Crown are limited in scope. None of
them, either separately or together, in my view, are suggestive of the broad
object and spirit that business losses are limited to real losses realized
outside the economic unit.
[93]
The provisions relied on by the Crown are s. 18(13),
18(14), 18(15), 40(3.3), 40(3.4), 54, former section 55, and s. 111(3), 111(4)
and 111(5). They are reproduced in an appendix.
[94]
Only one of these provisions deals with artificial
losses in general. It is former section 55(1), which was repealed when the GAAR
was introduced. When it was in force, it only applied to transactions on
capital account.
[95]
The Crown acknowledges that some of the other
provisions are also targeted to capital losses. They are s. 40(3.3), 40(3.4),
54 and 111(4).
[96]
In the case of provisions which target capital
losses, I do not believe that Parliament intended that they inform as to the
object and spirit of the provisions relied on by Global. The legislative
schemes relating to business and capital transactions are generally distinct.
[97]
As for provisions that apply to business losses, the
Crown relies on s. 18(13), 18(14), 18(15), 111(3) and 111(5). The problem that
I have with relying on these provisions is that each of them has a narrow focus.
[98]
Subsections 18(13), 18(14) and 18(15) are restricted
to losses from a money lending business and adventures in the nature of trade.
Subsection 111(3) narrowly targets a double deduction of losses. Subsection
111(5) restricts the deduction of losses on a change of control.
[99]
I am unable to discern a general policy from these
provisions, separately or together, that restricts business losses in the
manner that the Crown suggests. The provisions are too narrowly drawn to
disclose an intention by Parliament of a general restriction against the
deduction of artificially-created business losses.
[100]
For this reason, I have concluded that the first step of the abuse analysis has
not been satisfied by the Crown. In particular, the Crown has failed to
establish that the object and spirit of the provisions relied upon for the tax
benefit is to restrict business losses to “real losses realized outside the
economic unit.”
Positions of the parties in this
appeal
(a) The appellant Crown’s
position
[15]
The
submissions made by the Crown in this appeal are substantially different from
those it made in the Tax Court of Canada.
[16]
First, the Crown now specifically
relies on sections 3, 4, 9 and 111 of the Act for the GAAR analysis. In its
memorandum, the Crown offers at least two distinct but related rationales for
these provisions: (a) the first new rationale is that the object, spirit or
purpose of sections 3, 4, 9 and 111 is to allow the deduction of business
losses “only to the extent that they reflect an underlying actual economic loss”
so as “to ensure that a taxpayer’s loss for a taxation year is an actual and
accurate loss that reflects a true picture of the taxpayer’s business
operations over a defined period of time” (Crown’s memorandum at paras. 59 and
61); (b) the second rationale is that the object, spirit or purpose of these
provisions is to allow the deduction of true losses that reflect an actual
“reduction in wealth” (Crown’s memorandum at para. 71).
[17]
The
Crown relies for these rationales on the common dictionary meaning of the terms
“income”, “loss”, and “business” found in sections 3, 4 and 9 of the Act, and on
the decisions of the Supreme Court of Canada in Stewart v. Canada, 2002
SCC 46, [2002] 2 S.C.R. 645 (“Stewart”) and Canderel Ltd. v.
Canada, [1998] 1 S.C.R. 147 (“Canderel”).
[18]
Second, the Crown now also
relies on former subsection 245(1) of the Act which read as follows:
In computing income for the purposes of this act, no
deduction may be made in respect of a disbursement or an expense made or
incurred in respect of a transaction or operation that, if allowed, would
unduly or artificially reduce income.
[19]
Although
this provision was repealed as a result of the adoption of the GAAR, and though
it only dealt with expenses and disbursements, the Crown nevertheless submits
that the intended effect of incorporating it into the GAAR was to maintain a
general statutory assumption against transactions that produce artificial
results in computing losses for taxation purposes.
[20]
Third, the Crown now also
submits that the common shares of Newco were not acquired by Global as
inventory, or as part of an adventure in the nature of trade, that is, for resale
at a profit. As a logical consequence, the Crown adds that the loss resulting
from the transactions should have been denied under section 9 of the Act.
[21]
Fourth, the Crown now also adds
that these shares were capital property in the hands of Global, and that the
provisions of the Act which address capital losses as part of the capital gains
regime introduced in 1972 should therefore be considered and applied in this
case. The Crown refers to two recent decisions of the Tax Court of Canada where
the capital loss deductions in transactions similar to those under
consideration in this appeal were denied on the basis of GAAR. Since the
hearing of the appeal in this case, these two Tax Court decisions have been
affirmed by our Court: Triad Gestco Ltd. v. Her Majesty the Queen, 2012
FCA 258 (“Triad Gestco”) and 1207192 Ontario Ltd. v. AGC,
2012 FCA 259 (“1207192 Ontario”).
[22]
Fifth, whether or not the
loss in issue is deemed a capital loss, the Crown submits that the same
rationale as determined by the Tax Court of Canada in these two above-mentioned
cases should be applied to the interpretation of sections 3, 4, 9 and 111 of
the Act, since the transactions in this case are substantially similar to those
considered in Triad Gestco and 1207192 Ontario.
[23]
Finally, relying on the
comment of the Tax Court judge (at para. 102 of her reasons) that she would have
no hesitation in finding that the transactions at issue frustrate the object
and purpose of the provisions relied upon in light of their vacuous nature, the
Crown submits that this Court should conclude likewise.
(b) The respondent
Global’s position
[24]
Global
notes that the Crown failed to satisfy the
first step of the abuse analysis before the Tax Court judge. It submits that
the judge’s finding on this matter is unassailable, as is clearly apparent from the
fact that the Crown does not challenge in this appeal the judge’s
interpretation of the Act or any of the relevant provisions which it had put to
her.
[25]
Since
in a GAAR analysis the onus is on the Minister to identify the object, spirit
or purpose of the provisions of the Act that are claimed to have been
frustrated or defeated, Global asks how the Crown can argue in this appeal that
there is some “clear” rationale that only permits the deduction of true losses
representing “a decrease in wealth” when it keeps changing its mind and takes
inconsistent and incompatible positions in this Court and in the Tax Court of
Canada. Global submits that the Crown cannot be said to have met its burden in
such circumstances, as the taxpayer should be entitled to the benefit of the
doubt.
[26]
In
addition, Global notes that the Crown now argues in this appeal against its own
admissions made before the Tax Court judge and against its reassessment
position. Global adds that if the Crown believed that the non-capital loss
could be disallowed under section 9 of the Act, or that the loss was actually a
capital loss and not a business loss, the Minister could have reassessed on
that basis and the Crown could have pled such positions, led evidence, and
argued the same before the Tax Court judge. None of this was done.
[27]
Global
further submits that the new rationale put forward by the Crown relying on
sections 3, 4, 9 and 111 of the Act is, in essence, the Haig-Simons economic
formulation of income as the net accretion of wealth between two points in time,
a formulation which has not been enacted into law by Canada or any other
country. It refers for this purpose to the discussions of the Haig-Simons
formulation found in P. W. Hogg, J. E. Magee and J. Li, Principles of
Canadian Income Tax Law (Toronto: Carswell, 2010) at pp. 82-83; and in V.
Krishna, Fundamentals of Income Tax Law (Toronto: Carswell, 2009) at pp.
111 to 113.
[28]
Global
adds that nowhere in the text of sections 3, 4, 9 or 111 of the Act is there
any reference to the term “artificial” or “true losses” or “decreases in wealth”,
or any suggestion of there being any rationale that these provisions are only
intended to permit the deduction of “true losses representing a decrease in
wealth” as advanced by the Crown, or that “true losses” are included in any
calculation relevant to these provisions. Global further submits that nothing
is stated nor implied in section 111 that the loss carry over rules only apply
to what the Minister determines to be “true losses representing a decrease in
wealth”. For Global, regardless of how losses arise or whether a taxpayer
continues to have income from the relevant source, paragraph 111(1)(a)
provides that non-capital losses may be carried forward and carried back a
number of years.
[29]
Global
also notes that there are numerous provisions of the Act that deem income or
loss to arise in certain circumstances. For Global, this establishes that the
context of the Act does not support the Crown’s position that only true losses
representing a decrease in wealth may be claimed.
[30]
Global
also notes that former subsection 245(1) relied upon by the Crown applied to
deductions of disbursements or expenses that would unduly or artificially
reduce income, and neither of these circumstances exist in this case. The
appeal before this Court rather relates to a disposition of property on income
account at a loss.
[31]
Finally,
Global notes that the Crown is relying on an obiter comment made by the
Tax Court judge in order to support the second part of the subsection 245(4)
test, i.e. whether the transactions at issue frustrate or defeat the
rationale of the concerned provisions of the Act. Global submits that such a
conclusion cannot rationally flow from an obiter comment which does not
even identify the provisions of the Act which are allegedly frustrated or
defeated.
The issues
[32]
The
principal issues to be determined in this appeal may be stated as follows:
i.
Can
the Crown rely in this appeal on new arguments which were not raised by the
Minister in assessing the taxpayer nor relied upon by the Crown in the Tax
Court of Canada?
ii.
Do
the transactions in issue result in a misuse or abuse of the provisions relied
upon by the taxpayer within the meaning of subsection 245(4) of the Act?
Can the Crown rely in this appeal on new
arguments which were not raised by the Minister in assessing the taxpayer nor
relied upon by the Crown in the Tax Court of Canada?
[33]
Most
of the arguments raised by the Crown in this appeal were not raised by the
Minister in reassessing the taxpayer, nor relied upon by the Crown in the Tax
Court of Canada.
[34]
Subsection
152(9) of the Act governs the right of the Minister to advance an alternative
argument in support of an assessment. That provision was first introduced into
the Act in 1998 as a legislative response to the ruling of the Supreme Court of
Canada in Continental Bank v. Canada, [1998] 2 S.C.R. 358. It provides
for the following:
|
152. (9) The Minister may advance an alternative argument in support
of an assessment at any time after the normal reassessment period unless, on
an appeal under this Act
(a) there is relevant evidence that the taxpayer is no
longer able to adduce without the leave of the court; and
(b) it
is not appropriate in the circumstances for the court to order that the
evidence be adduced.
|
152. (9) Le ministre peut avancer un nouvel argument à l’appui
d’une cotisation après l’expiration de la période normale de nouvelle
cotisation, sauf si, sur appel interjeté en vertu de la présente loi :
a) d’une part, il existe des éléments
de preuve que le contribuable n’est plus en mesure de produire sans
l’autorisation du tribunal;
b) d’autre part, il ne convient pas
que le tribunal ordonne la production des éléments de preuve dans les
circonstances.
|
[35]
The
following principles have been found to apply when the Minister seeks to rely
on subsection 152(9): (a) the Minister cannot include transactions which did
not form the basis of the taxpayer’s reassessment; (b) the right of the
Minister to present an alternative argument in support of an assessment is subject
to paragraphs 152(9)(a) and (b), which speak to the prejudice to
the taxpayer; and (c) the Minister cannot use subsection 152(9) to reassess
outside the time limitations set out in the Act, or to collect tax exceeding
the amount of the assessment under appeal: The Estate of David G. Walsh v.
Her Majesty the Queen, 2007 FCA 222, 367 N.R. 127 at para. 18.
[36]
Applying
these principles to this appeal, I find that Global is prejudiced by some of
the new arguments submitted for the first time in this appeal. Specifically, the
Crown’s arguments that (a) the common shares of Newco were not acquired by
Global as inventory or as part of an adventure in the nature of trade, that is
for resale at a profit, and should consequently have been denied under section
9, and (b) that these shares were capital property and the capital gains
provisions of the Act should have been applied to the losses resulting from
their sale.
[37]
These
two new arguments involve issues of mixed fact and law for which an evidentiary
basis was not established in the Tax Court of Canada. Had these arguments been
initially made by the Minister or the Crown, Global might have adduced relevant
evidence in the Tax Court of Canada to counter them. As a result of the evidentiary
prejudice to Global, the Crown is precluded from raising these arguments in
this appeal, and these arguments shall therefore be disregarded.
[38]
The
other arguments raised by the Crown are all legal arguments made on the basis
of the existing evidentiary record, and they may therefore be advanced in this
Court. The transactions at issue are the same, no new reassessment is proposed,
no additional tax exceeding the amounts of the concerned reassessments is
claimed, and no new evidence is required to sustain or to counter these new
arguments. Moreover, Global’s counsel acknowledged at the hearing of this
appeal that no evidentiary prejudice resulted from these arguments.
[39]
Though
I conclude that some of the Crown’s new arguments may be properly raised in
this appeal, I cannot condone the Crown’s conduct in acting as it has. Taking
into account the handling of this litigation by the Crown, it is not surprising
that the Tax Court judge cautioned (at para. 9 of her reasons) about the
limited jurisprudential value of her decision. The taxpayer in this case has thus
had to respond to ever moving Crown arguments and positions, and some of these
are plainly contradictory to prior positions taken by the Crown. This is not a
proper way of conducting GAAR litigation where one of the principal questions at
issue is the discharging of the Crown’s burden to identify the object, spirit
or purpose of the provisions of the Act claimed to have been frustrated or
defeated.
[40]
As
a result, Global has had to assume in this case the costs of defending itself
from ever changing Crown positions concerning the GAAR in this appeal and
before the Tax Court of Canada. Taking into account that this is a GAAR case,
and the substantial and numerous changes in positions taken by the Crown, I am
of the view that Global should be awarded its costs in this Court and in the
Tax Court of Canada, irrespective of the result of this appeal. Moreover, in
this Court, Global’s costs should be determined on a two counsel basis at the
high end of column V of Tariff B.
Do the transactions in issue result in a
misuse or abuse of the provisions relied upon by the taxpayer within the
meaning of subsection 245(4) of the Act?
(a) The required analysis
[41]
As
already noted, the parties agree that the loss resulting from the transactions
at issue give rise to a tax benefit within the meaning of subsection 245(1) of
the Act. Moreover, Global does not challenge the finding of the Tax Court judge
that these transactions were avoidance transactions under the meaning of
subsection 245(3).
[42]
The
principal issue before us, therefore, is whether these avoidance transactions
amount to misuse or abuse under the meaning of subsection 245(4). The relevant
extracts of subsection 245(4) read as follows:
|
245.(4) Subsection
(2) applies to a transaction only if it may reasonably be considered that the
transaction
(a) would, if this Act were read without reference to
this section, result directly or indirectly in a misuse of the provisions of
any one or more of
(i) this Act,
...
or
(b) would
result directly or indirectly in an abuse having regard to those provisions,
other than this section, read as a whole.
|
245. (4) Le paragraphe (2) ne s’applique qu’à l’opération dont il
est raisonnable de considérer, selon le cas :
a) qu’elle entraînerait, directement
ou indirectement, s’il n’était pas tenu compte du présent article, un abus
dans l’application des dispositions d’un ou de plusieurs des textes
suivants :
(i) la présente loi,
[…]
b) qu’elle entraînerait,
directement ou indirectement, un abus dans l’application de ces dispositions
compte non tenu du présent article lues dans leur ensemble.
|
[43]
The
inquiry under subsection 245(4) contains two parts. The first step is to determine
the object, spirit or purpose of the provisions of the Act that are relied on
for the tax benefit, having regard to the scheme of the Act, the relevant
provisions and permissible extrinsic aids. The second step is to examine the
factual context of the case in order to determine whether the avoidance
transactions defeat or frustrate the object, spirit or purpose of the provisions
in issue: Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R.
601 at paras. 55 to 62 (“Canada Trustco”); Copthorne Holdings Ltd. v.
Canada, 2011 SCC 63, [2011] 3 S.C.R. 721 at paras. 69 to 73 (“Copthorne”).
[44]
The
first step is essentially a question of law, but it is incumbent on the Crown
to identify the object, spirit or purpose of the provisions that are claimed to
have been frustrated or defeated: Canada Trustco at paras. 44 and 65.
The textual, contextual and purposive analysis is employed for this purpose in
order to search for the rationale resulting from the words used in the
provisions or which underlies these words and which may not be captured by the
bare meaning of the words themselves: Copthorne at para. 70.
[45]
In
addition to the provisions of the Act that are relied on for the tax benefit, the
consideration of context may involve an examination of other sections of the Act,
as well as permissible extrinsic aids. However, as noted in Copthorne at
para. 91, “not every other section of the Act will be relevant in understanding
the context of the provision at issue. Rather, relevant provisions are related
‘because they are grouped together’ or because they ‘work together to give
effect to a plausible and coherent plan’ (R. Sullivan, Sullivan on the
Construction of Statutes (5th ed. 2008), at pp. 361 and 364).”
[46]
The
second step requires a consideration of whether the transactions fall within or
frustrate the identified purpose of the concerned provisions of the Act. This
is necessarily a fact intensive inquiry: Canada Trustco at para. 44. The
analysis will lead to a finding of abusive tax avoidance where the result of
the avoidance transactions (1) achieves an outcome that the statutory
provisions relied on were intended to prevent; (2) defeats the underlying
rationale of these provisions; or (3) circumvents certain provisions in a
manner that frustrates or defeats their object, spirit or purpose: Lipson v,
Canada, 2009 SCC 1, [2009] 1 S.C.R. 3 at para. 40; Canada Trustco at
para. 45. These considerations are not independent of one another and may
overlap: Copthorne at para. 72.
[47]
In
applying this test, there is no distinction between an “abuse” and a “misuse”,
since subsection 245(4) requires a single unified approach: Canada Trustco
at para. 43; Copthorne at para. 73.
[48]
In
any event, the GAAR may only be applied to deny a tax benefit when the abusive
nature of the transactions is clear, and if the existence of abusive tax
avoidance is unclear, the benefit of the doubt goes to the taxpayer: Canada
Trustco at paras. 50 and 66; Copthorne at paras. 68 and 72.
(b) The object, spirit or purpose of the
provisions of the Act that are relied on for the tax benefit
[49]
It
is not disputed that the provisions relied on by Global for the tax benefit
resulting from the transactions are sections 3, 4, 9 and 111 of the Act. These
are the core provisions for the purposes of the analysis under paragraph
245(4), and the Crown now recognizes - in this appeal - that it is the object,
spirit or purpose of these provisions which must be determined for the purposes
of the GAAR.
[50]
However,
the Crown adds that in determining the object, spirit or purpose of these
provisions, consideration must given to (a) former subsection 245(1) of the
Act, and to (b) the provisions of the Act concerning capital losses. I
disagree. Though in addition to the provisions of the Act that are relied on
for the tax benefit, the consideration of context may involve an examination of
other sections of the Act , as noted above, not every other section of the Act
will be relevant in understanding the context of the provisions at issue.
Rather, other provisions are relevant either because they are grouped together with
the directly relevant provisions or because all these provisions work together
to give effect to a plausible and coherent plan: Copthorne, at para. 91.
[51]
Former
subsection 245(1) has little or no relevance in the circumstances of this appeal.
That subsection provided that in computing income under the Act, no deduction
in respect of a disbursement or expense made or incurred in respect of a
transaction or operation would be allowed in circumstances that would unduly or
artificially reduce income. The circumstances contemplated under that former
subsection simply do not occur in the transactions at issue in this appeal. The
transactions before this Court do not concern artificial disbursements or
expenses, but rather a loss on income account following the disposition of
shares. Consequently, even if it had not been repealed, former subsection
245(1) would simply have been too remote from the transactions at issue in
order to be considered for the purposes of the required analysis.
[52]
Nor
may the Crown rely on the provisions of the Act relating to capital losses in
order ascertain the object, spirit or purpose of sections 3, 4, 9 and 111 of
the Act as they concern the use of business losses for taxation purposes. The
provisions of the Act relating to capital losses are distinct from those
relating to business losses, and these provisions usually operate independently
from one another. The Crown offers no support for its suggestion that the
rationales for capital losses and business losses are aligned and instruct each
other. To accede to the Crown’s position would be to search for an overriding
policy in the Act that is not based on a unified, textual, contextual and
purposive interpretation of the specific provisions in issue. The Crown’s
approach would send this Court on the search for an overreaching policy to
override the wording of the provisions of the Act, and it would inappropriately
place the formulation of taxation policy in the hands of this Court. This is
precisely what the Supreme Court of Canada instructs us not to do: Canada
Trustco at paras. 41-42:
[53]
The
issue at hand, therefore, is to identify the object, spirit or purpose of
sections 3, 4, 9 and 111 of the Act. However, it is not necessary to analyse
all aspects of these basic provisions of the Act, but only their object, spirit
or purpose as it may relate to the use of a business loss for taxation
purposes.
[54]
Section
3 provides the basic mechanism for determining a taxpayer’s income for a
taxation year. It sets out separate sources of income (office, employment,
business or property) and capital gains that are aggregated in subsections 3(a),
(b) and (c) and computed separately according to different rules.
Subsection 3(d) then allows a set-off of the taxpayer’s loss for the
year from employment, business or property against that aggregated amount.
[55]
Section
4 sets out that a taxpayer’s income or loss for a taxation year from an office,
employment, business, property or other source is the taxpayer’s income or loss
computed in accordance with the Act.
[56]
Section
9 provides (a) that a taxpayer’s income for a taxation year from a business or
property is the taxpayer’s profit from that business or property for the year,
and (b) the taxpayer’s loss for a taxation year from a business or property is
the amount of the taxpayer’s loss for the taxation year from that source
computed by applying the provisions of the Act respecting the computation of
income from that source, with such modifications as the circumstances require.
[57]
Section
111 allows a taxpayer to carry-forward and carry-back certain losses, including
business losses, for a certain number of statutorily defined years.
[58]
Regarding
income and losses that are sourced in a business, it is apparent from reading
these provisions that their underlying rationale is to make the taxpayer
subject to tax on business profits in the year the profits are realized, and
relieved from tax to the extent that there has been a business loss in that
year. Business losses of a given year may also be carried back or carried
forward to other years within a specified statutory period in order to offset for
taxation purposes certain other income sources.
[59]
The
Act does not define the key expressions used in these provisions, notably the
terms “income”. “profit” and “loss”. The fact that these key terms remain undefined
is clearly a deliberate legislative choice. The GAAR cannot and should not be
used to impute a special overarching meaning to these expressions. The use of
GAAR for such a purpose would inappropriately place the formulation of fundamental
taxation policy in the hands of the courts: Canada Trustco at para. 41. As
a general principle, courts should avoid judicial innovations and rule making
in tax law: Stewart at para. 4. As aptly noted by Iacobucci J. in Canderel
(at para. 41): “The law of income tax is sufficiently complicated without
unhelpful judicial incursions into the realm of lawmaking. As a matter of policy,
and out of respect for the proper role of the legislature, it is trite to say
that the promulgation of new rules of tax law must be left to Parliament.”
[60]
The
Crown suggests in this appeal that only the deduction of business losses that
reflect an “actual reduction in wealth” or “an actual economic loss” should be
recognized for income tax purposes under sections 3, 4, 9 and 111 of the Act.
These two expressions suggested by the Crown may have a meaning in the context
of economic theory or even some aspects of fiscal policy, but it is not clear
that they aptly describe all business losses that are or should be recognized
as such for income tax purposes. I do not agree with the Crown that it is necessary,
in the context of these proceedings, to impart such an overarching meaning to the
concept of a business loss, an exercise which Parliament has itself deemed
inappropriate.
[61]
The
analysis required here under the GAAR and concerning the treatment of a loss
resulting from a business source under sections 3, 4, 9 and 111 of the Act must
consequently be much more modest.
[62]
The
policy or purpose underlying these provisions is grounded in the words of the
provisions themselves. However, as part of the analysis, we must also “look
beyond the mere text of the provisions and undertake a contextual and purposive
approach to interpretation in order to find a meaning that harmonizes the
wording, object, spirit and purpose of the provisions of the Income Tax Act”: Canada
Trustco at para. 47. The fundamental rationale underlying these provisions is
that, in order to be used for taxation purposes, business losses must be grounded
in some form of economic or business reality. As noted in Canderel at
para. 53, “[i]n seeking to ascertain profit, the goal is to obtain an accurate
picture of the taxpayer’s profit for the year.” That same common sense principle
applies to a business loss, thus harmonizing the concept of business loss with
the related concept of profit under the Act.
[63]
There
is some flexibility in the concept of business loss. Nevertheless, a textual,
contextual and purposive interpretation of sections 3, 4, 9 and 111 of the Act
as they relate to that concept, leads to the rationale that if a business loss
is to be used for taxation purposes under those provisions, there must, at the
very least, be an air of economic or business reality associated with that
loss.
(c) Do the transactions at issue defeat
or frustrate this object, spirit or purpose?
[64]
Determining
whether the transactions at issue defeat or frustrate this underlying policy or
purpose is a question of mixed fact and law. In this case, the Tax Court judge did
not consider the issue, save to comment (at para. 102 of her reasons) that had
she agreed with the Crown’s position on the first step of the analysis under
subsection 245(4), she would have concluded that the second step was satisfied.
I agree with Global that this obiter comment cannot support a conclusion
on the second part of the analysis.
[65]
It
is thus necessary to consider whether this analysis should be remitted to the
Tax Court judge for a new determination in accordance with these reasons. The
matter could indeed be returned to the Tax Court judge. However, it is well
established that appellate courts have the jurisdiction to make a fresh
assessment of the evidence on the record where they deem such an assessment to
be in the interests of justice and feasible on a practical level: Masterpiece
Inc. v. Alavida Lifestyles Inc., 2011 SCC 27, [2011] 2 S.C.R. 387 at para.
103; Hollis v. Dow Corning Corp., [1995] 4 S.C.R. 634 at para. 33. In
this case, this Court has a complete record on which to make a determination on
the second step of the subsection 245(4) analysis. Determining the issue now
will avoid further delaying the proceedings. Moreover, I am of the view that
the interests of justice would be well served by this Court finally deciding
the matter.
[66]
The
loss generated by Global as a result of the transactions resulted from a value
shift between one of the classes of shares held by Global to another class of
shares it held. This is simply a paper loss. The fundamentals of the
transactions are simple: the inherent value of the common shares in Newco held
by Global was moved to the preferred shares issued to Global, with the result
that the common shares were left with little value but still with a high cost
associated to them, while the preferred shares issued as a dividend had a high
value but a low associated cost. Nothing was gained or lost, however in selling
the common shares to the Children’s Trust, Global technically realized a large
loss on paper.
[67]
The
vacuity and artificiality of transactions may confirm their abusive nature: Mathew
v. Canada, 2005 SCC 55, [2005] 2 S.C.R. 643 (sub. nom. Kaulius v. The
Queen) at para. 62. The Tax Court judge found that the transactions at
issue in this case were “vacuous” and “highly artificial”. I agree. Like the
proverbial rabbit out of the magician’s hat, the loss which occurred as a
result of these transactions was pulled out of thin air. These transactions are
nothing more than a paper shuffle carried out with the purpose of creating an
artificial business loss for the purpose of avoiding the payment of taxes
otherwise owed on the profits resulting from the real-world business operations
of Global.
[68]
There
is no air of economic or business reality associated with the loss, and
consequently, I find that the transactions which created this artificial loss defeat
the underlying rationale of sections 3, 4, 9 and 111 of the Act, to the extent
that these provisions allow for the use of business losses for income taxation
purposes.
Conclusions
[69]
I
would therefore allow this appeal with respect to the GAAR issue. Nevertheless,
for the reasons set out above, Global should be entitled to its costs in this
Court and in the Tax Court of Canada. In this Court, Global’s costs should be
determined on a two counsel basis at the high end of column V of Tariff B.
"Robert M.
Mainville"
“I
Agree.
M. Nadon.”
“I
Agree.
Johanne Gauthier.”
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